Prior to the recent sell-off which was spurred on by fears that the Fed may taper its quantitative easing programme, defensive blue chip dividend-paying stocks have led the rally, as investors plunged into "safer" assets that can offer an attractive level of income. Barnett, who runs the five crown-rated Invesco Perpetual UK Strategic Income fund, says these types of companies now represent better value since the correction. More importantly, he says, is the fact they can increase their dividends, which will allow them to continue outperforming.
"Over the long-term, the best returns are always made from the best companies that can continually grow their dividend," Barnett said.
He says these defensive UK equities are the ones that can get the most of the current environment of anaemic economic growth.
"Frankly, the most important variable to understanding how much economies have changed is to see how much the banks are prepared to lend again," he explained.
"It is fair to say that the big US banks are getting through their process to start lending at normal levels and though I don’t know when the end point will be, they are getting closer to it. Unfortunately, the UK and continental banks are behind the curve."
"They are still writing off peak assets and so loan growth is still low, which has a direct correlation with economic growth. Clearly, the US is doing much better and I think the best we can hope for is the UK growing at 1 per cent."
"So what does that mean for equities?"
"Well, I don’t think equities will deliver the same amount they have over the last 12 months, but valuations still look attractive."
"We have had a bit of a wobble recently around fears over QE and the state of the financial system in China. But I think the correction was overdue; I felt that equities were looking stretched and I think the correction was appropriate," he added.
Although he says equities are still the most attractive asset class, he still feels that the economic backdrop does not suit more cyclical stocks.
"My portfolio has remained largely unchanged. The economic backdrop is tough, though there won’t be a recession. There will be a recovery, but because there will be such low growth, it won’t feel like one," he said.
"In that background, revenue growth will remain low. What I want are companies that can say they can deliver 5 per cent revenue growth and actually do it. That is because if you can get dependable revenue growth, that will feed into better earnings and higher dividend growth."
"Those sorts of companies are the ones that will have increasingly higher ratings," he added.
Barnett counts the likes of Imperial Tobacco, AstraZeneca, British American Tobacco and GlaxoSmithKline as top-10 holdings within his £264m Invesco Perpetual UK Strategic Income fund.
The manager continued: "These sorts of companies offer sustainable dividend growth and the yields look attractive. Those yields are substantially ahead of what you can get from their equivalent credits. But most importantly, via the company’s shares you are getting dividend growth."
"Ultimately, that is what makes the market re-price over time," he added.
Barnett has managed Invesco Perpetual UK Strategic Income since June 2006.
Over that time it has made 78.6 per cent, nearly double the amount made by the IMA UK Equity Income sector and enough to make it the sixth best-performing fund overall.
It has also considerably outperformed the FTSE All Share over this period.
Performance of fund vs sector and index since June 2006
Source: FE Analytics
Invesco Perpetual UK Strategic Income is a top-quartile performer over one, three and five years.
The fund is yielding 3.43 per cent and our data shows it has been able to increase this net distribution of income over the last year.
Barnett still thinks equity income will remain a popular theme for the foreseeable future and he feels that investors have drastically over-reacted to Federal Reserve chairman Ben Bernanke’s comments regarding the future of QE.
"I think Bernanke’s statements have been misunderstood a bit," he explained.
"He has said the Fed will scale down the amount of purchases; it isn’t game over for QE, it is just less buying, so this process could go on for a couple of years. Markets have reacted in an overly alarmist fashion as they think QE is going to be turned off like a light switch."
"The authorities are cognisant to the impact that would have on the economy. Inflation is very benign and at the end of the day, that was what it was designed to boost. It was designed to offset the lack of lending growth which is by definition, deflation."
"Despite all their liquidity, inflation isn’t high and so they want to get to the point where the banking sector starts acting normally again and we are not there yet."
"There are now fewer options for policy-makers, as interest rates can’t go any lower. While QE won’t deliver an economic recovery – that is up to the politicians – it does provide companies time to repair their balance sheets and it staves off deflation," he added.
Invesco Perpetual UK Strategic Income has an ongoing charges figure (OCF) of 1.2 per cent and requires a minimum investment of £500.
Barnett also heads up the Perpetual Income & Growth trust, and the Keystone IT, which sits in the IT UK Growth sector.
Such is Barnett’s preference for defensive dividend-payers that even Keystone’s top-10 is full of companies such as AstraZeneca, Glaxo, Roche and BAT. It is currently yielding 3.14 per cent, which is very high for a trust in this sector.
