Fallen star fund manager Neil Woodford’s one-time flagship fund Woodford Equity Income is now returning its depleted capital to investors.

The first payment of cash to investors is expected to be on or around 30 January, representing about 70% of the fund’s current value.

If you feel royally let down by Woodford and want a better fund generating income, help is at hand. Rather than being lured in solely by the cult of a star manager, you should look for funds and trusts which have a clear and consistent strategy and a track record of long-term success. You might also want to consider spreading your money across a number of funds rather than just one collective.

With the Woodford cash now being returned, later in this article we shine a light on four high-quality equity income funds to consider buying.

WHAT WENT WRONG?

Historically Woodford came close to being sacked from Invesco Perpetual in 1999 as the dotcom bubble peaked, leaving his performance trailing. Yet when unprofitable tech stocks collapsed, it was his funds that soared as sanity returned to markets.

After setting up his own company, Woodford Investment Management, the fund manager ruled the roost and his decisions weren’t challenged in the same way they were at Invesco.

Furthermore, Woodford began to pursue a more growth-focused approach, which involved picking smaller quoted companies as well as putting money to work with unquoted companies. That was a very different approach to the large cap focus which had previously been his focal point and where he had made his name as a stock picker.

By early 2019 nearly 20% of the Woodford Equity Income fund was in companies which were not listed on a recognised stock market. This led to a liquidity problem.

When performance suffered and Woodford faced an increasing number of redemptions he found these assets difficult to sell in order to return cash to shareholders and this ultimately led to the fund’s suspension.

Investors have been waiting since June 2019 to access their money. The cash is now finally being paid back so it is time for these investors to find a better way of generating income from the markets. We now offer four fund suggestions.

FOUR WAYS TO REINVEST YOUR WOODFORD CASH

Investors scarred by the Woodford debacle and seeking to recycle proceeds into a cautious equity income vehicle might like Franklin UK Rising Dividends. Managed by large cap equities specialists Colin Morton and Ben Russon, the fund aims to provide a growing level of income together with capital growth to achieve a total return that exceeds that of the FTSE All-Share.

According to Trustnet, it has outperformed the IA UK All Companies sector on a cumulative return basis over one, three and five-year periods. As at 31 December 2019, the top 10 included oil major Royal Dutch Shell (RDSB), drinks giant Diageo (DGE) and packaged consumer goods firm Unilever (ULVR).

Optimistic about potential rising dividend opportunities among UK-listed firms, Morton’s experience tells him that a strong track record of dividend growth can offer clues to the long-term performance potential of a company.

Morton looks for dividend growers that are leaders in their respective industries or niches, have attractive secular growth opportunities and whose management teams have demonstrated sound capital allocation decisions.

He appears to be sticking with the tobacco sector as evidenced by the presence of British American Tobacco (BATS) and Imperial Brands (IMB) among the top holdings.

Prospective investors are also getting exposure to drugs giants GlaxoSmithKline (GSK) and AstraZeneca (AZN) and publishing play RELX (REL), among others.

An investment trust trading at an attractive 5.8% discount to net asset value (NAV) is Dunedin Income Growth. One of Winterflood Investment Trusts’ 2020 recommendations, the trust is managed by Ben Ritchie and Louise Kernohan at Aberdeen Standard Investments.

Their philosophy is that fundamentals drive share prices, but are often priced inefficiently and in-depth research can be used to exploit mispricing. Over the last three years the trust has been repositioned, shifting away from higher yielding stocks towards small and medium-sized companies that can grow their dividends.

Winterflood flags a marked pick-up in relative performance over the past year, with the trust being the second best performer in its peer group over the last 12 months in NAV terms. Income seekers will welcome the fact Dunedin Income Growth has increased its dividend in 35 of the last 39 financial years.

It maintained the payout in the other four instances. Despite the shift to lower yielding shares, Winterflood also notes that earnings covered the dividend in the most recent financial year. Analysis of the top 20 holdings as at 31 December reveals stakes in large caps such as utility National Grid (NG.), insurers Prudential (PRU) and Chesnara (CSN), and holdings in companies as diverse as chemicals firm Croda (CRDA), housebuilder Countryside Properties (CSP) and computer-aided design software play AVEVA (AVV).

If you are looking to diversify sources of income away from a UK market that suffers a high degree of dividend concentration, you should go global in your quest for payouts. Launched in 2011 with the aim of meeting this need, we think the Ben Lofthouse-managed Henderson International Income Trust fits the bill nicely.

This fund is the only global equity income investment trust that specifically excludes the UK market, one to which many investors will already boast sufficient exposure. Research group Edison points out since launch, the trust has traded at an average premium to NAV of 0.8%, which reflects its unique mandate and investors’ appetite for income.

Henderson International Income Trust’s board regularly issues shares to sate demand for the strategy. Investors have enjoyed total returns of around 9% a year over the past five years and a progressive shareholder reward, supported by well-covered dividends that have grown at a compound annual rate of 5.2% since launch in 2011. 

Value-oriented manager Lofthouse looks for cash-generative companies with secure and growing dividends.

He blends higher-yielding holdings with those that are lower yield but which enjoy with superior dividend growth prospects. Reassuringly, the trust’s own dividends are fully covered by income.

As at 31 December 2019, the top 10 included Microsoft, Nestle, Novartis and Coca-Cola, plus Taiwan Semiconductor Manufacturing and Chevron. We believe the portfolio could provide ballast during future bouts of market volatility.

Managed by value-focused stockpicker Henry Dixon, Man GKG UK Income seeks to achieve a level of income above the FTSE All-Share, together with some capital growth. Although the fund is a multi-cap book, the portfolio breakdown reveals that its holdings are predominantly investments from the FTSE 100 and FTSE 250 ranks.

This Morningstar five-star rated fund offers an attractive 5.4% yield and has delivered impressive five-year annualised total returns of 10.5%. Given the emphasis on large and mid caps (and lowly starting valuations), we think the fund offers a favourable risk-reward balance.

The well-regarded Dixon seeks to identify companies trading below his estimation of the value of their tangible assets (such as property, plant and equipment) or whose profits he considers to be undervalued.

A first quartile performer over five years, Man GLG UK Income’s portfolio is diversified across 64 holdings with leading positions as at 31 December including tobacco firm Imperial Brands, British Airways-owner International Consolidated Airlines (IAG), housebuilder Redrow (RDW) and budget carrier EasyJet (EZJ).

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