10 alternatives to Neil Woodford and Terry Smith

Neil Woodford's CF Woodford Equity Income and Terry Smith's Fundsmith Equity are once again among two of the most popular funds this year. The former had over £6.9 billion under management one year ago; now it has £9.4 billion. The latter has grown from almost £3.7 billion one year ago to almost £8.2 billion, according to data from FE Analytics.

But the danger of following the crowd is that investors run the risk of devoting too much of their portfolio to Woodford and Smith. Apart from the danger that too much depends on one star manager, there is a real problem of size.

When funds get this big they become very unwieldy and have smaller choice of stocks they can invest in, because they're dealing with such large sums that they can only look at the largest and most liquid option, while smaller funds have more choice and are nimbler.

With this in mind, we ask experts for alternative fund suggestions that invest in a similar style.

Fundsmith equity alternatives

Darius McDermott of ratings firm FundCalibre recommends Rathbone Global Opportunities as an alternative to Fundsmith Equity.

He explains that the fund has been managed by James Thomson for a decade; Thomson likes simple, scalable businesses with entrepreneurial and flexible management teams. He aims to find innovative companies and invest in them early.

The fund has a global focus, like Fundsmith. It can invest in any company, of any size, from around the globe, but has historically had very little direct exposure to emerging markets - Thomson acknowledges that his core strength is in developed markets and sticks to what he is good at.

The other alternative McDermott recommends is Sanlam FOUR Stable Global Equity. With 72% of its holdings in US equities, it has a higher exposure to North America than Fundsmith Equity which has about 62% of its assets in the region.

The Sanlam team seeks non-cyclical shares to protect from volatility, and seldom changes investmentsThe managers can invest in any company they choose and they have high conviction in their ideas, with around 25 companies in total in the portfolio.

The team likes out-of-favour holdings; like Terry Smith, it seeks non-cyclical companies to avoid high sensitivity to changes in the economy, and it doesn't change investments very often. This means the fund tends to be relatively resilient in turbulent market conditions.

Jason Hollands of Tilney Bestinvest recommends JOHCM Global Opportunities managed by Ben Leyland. The fund invests in a concentrated portfolio of global equities and - like Fundsmith - is managed on an unconstrained basis.

The fund has only 26% of its assets in US equities, and a further 14% in the UK and 12% in Japan.

Cash flow analysis is a key component of stocks selection, adds Hollands. The manager has something of a "total return" mindset and is prepared to position the fund defensively, currently holding 20% in cash.

Hollands also recommends Ardevora Global Long-Only Equity, a diversified, multi-cap fund managed by Jeremy Laing and investing in both value stocks and companies with earnings momentum.

It uses Ardevora's distinctive investment philosophy, which is grounded in cognitive psychology, to gain insights into biases in behaviour in order to screen out risky stocks and target those mispriced by anxiety.

Rebecca O'Keeffe, investment director at Interactive Investor, recommends Lindsell Train Global Equity. It is itself a very popular choice run by Michael Lindsell and Nick Train, who take the same "buy and hold" approach as Smith. The fund is a first-quartile performer over the short and long term, says O'Keeffe.

She adds that it has been able to ride the rallies in 2016 without succumbing to any of the dips and is up 27% year to date. With 70% invested overseas, this fund has benefited from the weakness in sterling.

Woodford equity income alternatives

When it comes to finding alternatives to CF Woodford Equity Income, McDermott recommends Royal London UK Equity Income, a core equity income fund investing in high-yielding UK stocks. While Woodford Equity holds an element of the portfolio in non-UK equities, this fund has only UK equities.

The manager builds a portfolio suitable for all market conditions, by prioritising companies with free cash flows. McDermott says this means that his holdings are likely to offer increasing dividends whilst avoiding overvalued stocks, and therefore generate a good total return for investors.

McDermott further recommends Threadneedle UK Equity Income, a contrarian value fund co-managed by the highly experienced Richard Colwell.

Colwell invests according to a 'think active, act lazy' philosophyThe team avoids speculative stocks, which are currently fashionable and have short-term momentum. Instead, it looks for unloved companies with the ability to sustainably grow their dividends.

Like Woodford, Colwell believes in being patient and not over-trading. He has a "think active, act lazy" philosophy, aiming to have conviction with all his investments and he is not afraid to ignore whole parts of the market.

Hollands recommends Evenlode Income, which is similar to Woodford in that it invests in high-quality companies. It is run by rising stars Hugh Yarrow and Ben Peters and invests in a concentrated portfolio of "cash compounders" from across the market-cap spectrum.

These are high-quality businesses, says Hollands, with strong and visible free cash flow generation and typically not tied down by owning a lot of capital assets that need to be serviced.

The other alternative Hollands suggests is Standard Life UK Equity Income Unconstrained, a multi-cap fund which has much higher weightings in small and mid-cap stocks than most other funds in the sector.

This hurt performance earlier this year, and the fund lost 5% over the last 12 months. But Hollands argues that it has nevertheless delivered good results since Thomas Moore took on the fund in 2009. Over five years the fund has returned an impressive 92%.

As an alternative to Woodford Equity Income, O'Keeffe recommends Franklin UK Equity income, which she says is a less well-known but equally impressive alternative for income investors.

She commends the common sense, pragmatic approach to investing adopted by the highly regarded Franklin UK equity team, which has worked very well over the changing UK investing landscape. Its two largest sector weightings are industrials and health & household.

This article was originally published by our sister magazine Money Observer here

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.