Neil Woodford is probably about as close to a household name as you get when it comes to investments. Over more than three decades, he has produced good returns and has a loyal following. However, over the past couple of years, the performance of his flagship Woodford Equity Income fund has been disappointing and, over the past 12 months, the value of the fund has fallen about 18%*.
Because he is well-known, he tends to get more attention from the press and his funds came under scrutiny again this weekend in the national newspaper money sections.
Deciding if and when to sell an underperforming fund is difficult - especially when it is run by a fund manager such as Neil Woodford - and it is important for investors to think about why they invested in the first place, and if the investment case for their personal portfolio still holds true.
Understanding the underperformance is also important: Neil's style is one of the reasons the fund has suffered, as he holds many UK companies which are domestically-facing and undervalued. But as Brexit drags on and on, they are not being given the opportunity to recover.
The knock-on effect is that the funds have suffered large redemptions as many investors have taken their money elsewhere. This in turn has made managing the fund very difficult and Neil has been a 'forced' seller of some of his stocks, even if they have have done well, in order to meet those redemptions: like AJ Bell just before the company floated and the stock price rose some 300%. It's a vicious circle.
As regular readers of Viewpoint magazine will know, his situation has split our team for some time.
The fund entered the Chelsea RedZone in January, and it's with regret that we have now moved it to a generic 'switch' rating. We will revisit the fund again when it is no longer in redemption.
For those who are thinking about switching their holdings, these five funds on the Chelsea Selection are worth a closer look:
Of the 86 funds in the UK Equity Income sector, just six have produced positive returns in the past 12 months*, as equity markets around the world have fallen.
One of these funds is LF Gresham House UK Multi Cap Income. Run by Ken Wotton, and launched two years ago in June 2017, it has a bias towards smaller-sized UK companies and has returned 2.72%* over one year. The target yield is 4%.
Threadneedle UK Alpha Income is perhaps the closest Selection fund to Woodford Equity Income, in terms of investment style. The manager has a contrarian-value style, investing in unloved stocks he believes can sustainably grow their dividends. It has returned -6.99%* over the past year and a current yield of 4.3%**.
Another option is Rathbone Income. Managed by Carl Stick since the turn of the millennium, this multi-cap fund has one of the best track records in its sector of increasing its dividend – having done so in 24 of the past 25 years. It has returned -1.72%* over the past year and has a current yield of 4.24%**.
Marlborough Multi Cap Income is another fund that invests in companies of all shapes and sizes, but with a bias towards micro, small and mid-caps. It has a current yield of 4.61%** and has returned -2.39%* over the past year.
Our final suggestion is Montanaro UK Income fund. Although not in the UK equity Income sector as its manager is keen not to have a yield constraint, it sits in the UK All Companies sector with the Woodford Equity Income fund. This fund invests in medium and smaller companies and has a yield of 3.4%**. It has returned -2.88%* over the past 12 months.
*Source: FE Analytics, total returns in sterling, one year to 31 May 2019
**Source: FE Analytics, 3 June 2019
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the Chelsea fund research team and do not constitute financial advice.