Should you buy Neil Woodford’s new income fund or make it yourself?

Neil Woodford, the UK’s most respected fund manager, is back with a new fund set to launch in the next few weeks. It’s the third and final one planned for launch by Woodford’s independent fund management house, set up when he went solo after leaving Invesco several years ago

The new Woodford Income Focus fund is, as its name suggests, an income fund. Unlike the CF Woodford Equity Income fund, it’s designed to target a certain level of income, 5p per share (100p) to begin with, for a yield of 5%. However, considering Woodford’s popularity, I expect this yield to drop rapidly to around 4% or less after the fund’s launch, slightly above the yield of the Equity Income fund, which currently stands at 3.2%.

Sill, if you buy into the launch, the returns on offer are pretty attractive considering the current interest rate environment.

But there’s one issue that has not attracted much attention, and that’s Woodford’s fees.

Watch for fees

The Income Focus fund is expected to charge 0.75% per annum in management fees. This is hardly a crippling sum but it’s still more than you’d pay if you were to manage the funds yourself. What’s more, this cost excludes any other platform costs.

Hargreaves Lansdown, for example, changes 0.45% per annum as a platform charge for a total cost of 1.05% per annum to the investor (after deducting certain discounts). These fees ultimately reduce the total income available from the fund. If you buy-in at launch, fees of 1.05% per annum will bring the yield down to 3.95%, which doesn’t look quite so appealing.

In fact, you may be able to achieve a better return by investing your money in stocks yourself without paying Woodford Investment Management for the privilege.

Searching for income

Neil Woodford has revealed what he’s looking for in a potential dividend investment — a high yield with potential for growth. Dividend stocks with these qualities are not difficult to find. The market, especially the FTSE 100, is littered with such businesses, some of which offer a higher yield than the 5% expected to be on offer at the Income Fund. Both Shell and BP yield more than 6%, HSBC also falls into the category and so does income champion Legal & General.

If held in a low-cost online brokerage account, a well-diversified basket of these equities has the potential to produce a much higher return than that of Woodford’s fund. And if you’re not interested in building your version of Woodford’s income fund, there are other funds out there that might offer a better return. The iShares UK Dividend UCITS ETF currently yields 4.7% and only charges 0.4% per annum in fees.

When all the costs are taken into account, these two funds offer the same returns and if you’re looking to buy after the Woodford launch, the ETF might be a better bet as it’s unlikely to attract the same Woodford premium and won’t quickly become too expensive.

Overall, the new Woodford Income fund is an interesting concept, but it’s not the last word for income investors.

Looking for growth stocks? 

If you want to replicate Neil Woodford's strategy but don't know where to start, our analysts here at the Motley Fool have plenty of ideas. There's one stock on our radar right now that we believe stands head and shoulders above the rest of the market.

This company is established and already has a record of impressive growth behind it. Going forward, our analysts believe the available upside is as much as 50%.  

In fact, we believe this hidden gem might just be the perfect stock. Click here to find out all about this opportunity today. 

Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended BP, HSBC Holdings, and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.