The UK's finest fund manager is leaving his current employer to set up his own business.
I'm talking about Neil Woodford, the manager of the Invesco Perpetual Income and High Income funds.
There's no question that Woodford has a cracking record. He's especially well known for avoiding tech stocks in the run-up to the dotcom crash in 2000. He also sold all his bank shares before the credit crisis in 2008.
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His High Income fund is the top-performing equity income fund over the last ten years and has delivered a 230% return.
Surprise news is a blow to Invesco
Woodford will stay with Invesco until next April and will then launch his own fund management business. A manager called Mark Barnett will succeed Woodford as manager of the two Invesco income funds.
I expect many private investors will be tempted to bail out and sell their holdings in both funds immediately. But my advice would be to stay put at least for now.
Remember, if you switch to another fund, you'll probably have to pay a chunky initial charge to your new fund manager. So you should only move your money if you think there's a very strong chance your investments will grow faster if you switch.
For what it's worth, one of my colleagues here at MoneyWeek knows Barnett and rates him. We expect Barnett to follow a similar investment approach to Woodford, focusing on large companies that pay sustainable, growing dividends.
Don't put any new money in
Let's imagine you're managing a £10bn fund, and you spot a £100m company that you think is undervalued. You wade in aggressively and buy 10% of the company.
You buy so many shares, you push up the share price and you end up with a 10% stake in a £120m company. (Your stake is now worth £12m.) Even if this company's share price now doubles, you'll only made a £12m profit. That makes very little difference to the performance of a £10bn fund.
But if your fund only has £300m in assets, a £12m profit can make a material difference to the performance of your fund. So managing a small fund is far easier than managing giant funds such as Woodford's.
In fact, I can't help wondering if the prospect of managing a smaller fund is at least part of the reason why Woodford wants to leave Invesco.
Think about DIY investing
After all, 34% of the High Income fund is invested in just five stocks. Here they are:
The simplest approach would be just to buy these five shares and leave it at that.
However, I should stress this would be a high-risk plan. That's because three of these five shares are pharmaceutical companies, so if something went wrong with the pharma sector, you could be badly hit.
The more prudent approach is to build a more diversified portfolio with more stocks across a wider range of sectors. If you want advice on which stocks to buy, check out Stephen Bland's Dividend Letter, which focuses on building income portfolios for the long-term.
What about the Edinburgh trust?
That said, I'm not sure that now is a great time to invest in the Edinburgh trust. It's currently trading at a 4% premium to the net asset value. In other words, if you buy now, you're paying £1.04 for assets that are worth £1.
Regardless of who the fund manager is, I'm not prepared to buy shares in an investment trust at a premium. I just don't see the point.
But if the Edinburgh trust falls back to a discount, it could be another great way to invest for income. Especially if Woodford does continue to manage this fund.
The Dividend Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Past performance is not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer Services: 020 7633 3600.
Ed has been a private investor since the mid-90s and has worked as a financial journalist since 2000. He's been employed by several investment websites including Citywire, breakingviews and The Motley Fool, where he was UK editor.
Ed mainly invests in technology shares, pharmaceuticals and smaller companies. He's also a big fan of investment trusts.
Away from work, Ed is a keen theatre goer and loves all things Canadian.
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