Don’t bet on finding another Woodford

Fund managers of Neil Woodford's calibre are few and far between. Paul Amery explains why you're better off buying these passive funds instead.

Neil Woodford's High Income fund has returned his investors' seed money 22 times over in 25 years, far more than the index or an average of his rivals. Can his replacement duplicate this, or can Woodford do it elsewhere?

It's a very tall order. The sales pitch of active fund management is based on managers' skill, not chance. But managers who achieve what Woodford has done are statistically very rare.

It's impossible to know if such a record is down to luck or skill. Put another way, of the thousands of fund managers, a Woodford is bound to pop up sooner or later. But can you pick him?

So, all you can be sure of if you buy Woodford's (or his replacement's) income funds is costs: 1.67% in charges for the Invesco Perpetual High Income Fund, plus another 0.14% a year in commissions and taxes generated by the manager's turnover.

The Edinburgh Investment Trust (LSE: EDIN), also run by Woodford, levied 1.9% in fees last year (0.7% in charges, plus 1.2% as a performance fee), plus 0.1% in turnover-related costs.

Either way, you're getting on for 2% in charges per year for either fund (and that's assuming you found someone to waive the initial charge of 5% on the High Income Fund).

Investors in his trust have also just seen a near-10% swing in its secondary market price as the fund swung from a premium to a discount to net asset value (in other words, the shares went from trading above the price of the underlying portfolio to below it) after Woodford's decision to leave Invesco was announced.

If instead, you buy an exchange-traded fund (ETF), or index fund tracking a high-income index, you'll end up holding many of the pharmaceutical and tobacco stocks that Woodford's active funds still hold.

These index funds tend to hold less concentrated portfolios than Woodford, who takes big bets. Nor should they swing to premia or discounts. More importantly, they're far cheaper: Vanguard's UK Equity Index Fund costs 0.25% a year, SDPR Europe's UK Dividend Aristocrats ETF (LSE: UKDV) charges 0.3% and iShares' UK Dividend ETF (LSE: IUKD) costs 0.4% a year. Trading costs add a few basis points a year on top, but they are nowhere near the price of an average active fund.

Personally, I'm not a fan of income stocks right now I think the flood of quantitative-easing-inspired hot money has left them overvalued. But if I were buying an income fund, I'd definitely prefer an ETF or index fund over an active fund that costs up to eight times more.

Paul Amery, formerly a fund manager and trader, is now a freelance journalist.

Recommended

Why the market is wrong about private equity
Investment trusts

Why the market is wrong about private equity

When it comes to listed private-equity trusts, investors are overly sceptical, with many funds trading at heavy discounts to their net asset values. B…
9 Aug 2022
Asia: long-term opportunities amid short-term noise
Advertisement Feature

Asia: long-term opportunities amid short-term noise

In a tough first half of the year for financial markets, Asia has struggled more than most. But that weakness may represent an opportunity for invest…
26 Jul 2022
Analysis: it’s been a terrible six months for investment trusts
Investment trusts

Analysis: it’s been a terrible six months for investment trusts

The first half of the year has not been kind to investment trusts because of their skew towards growth stocks and the global downturn, says Max King. …
25 Jul 2022
The ten investment trusts with the highest dividend yields
Investment trusts

The ten investment trusts with the highest dividend yields

Investment trusts are one of the best ways to participate in the stockmarket, and the way they are structured means they can maintain their dividends …
22 Jul 2022

Most Popular

Are UK house prices finally heading for a crash?
House prices

Are UK house prices finally heading for a crash?

The latest house price figures show a fall of 0.1% in July. With interest rates rising, inflation hitting double figures and a recession on the cards,…
5 Aug 2022
Brace yourself for the return of rationing
Economy

Brace yourself for the return of rationing

Russia is turning off the cheap energy. That is already leading to belt-tightening, says Matthew Lynn. Who will suffer most, and which sectors will th…
5 Aug 2022
Fear of missing out – what should investors do now?
Investment strategy

Fear of missing out – what should investors do now?

Markets have rallied from their mid-June lows. But if you missed out, as most investors did, what should you do now? Max King explains.
8 Aug 2022