FE Analytics data shows that the total assets of Invesco Perpetual Income have fallen from £10.564bn to £9.266bn in just under two months, while Invesco Perpetual High Income has shrunk from £13.960bn to £13.454bn. This represents a total loss of £1.804bn.
Given that both funds have made positive returns of around 2 per cent since 15 October this year, it is safe to assume that the actual outflows figure is greater than this.
As the graph below shows, the outflows from these five crown-rated funds are unprecedented, and clearly a direct result of the FE Alpha Manager’s announcement earlier this autumn.
Historical size of Invesco Perpetual Income since Nov 2010
Source: FE Analytics
Total assets of the fund have fallen by more than 12 per cent over the period.
Outflows from the High Income fund have been far less pronounced, and given its larger size, the percentage of loss is much lower, at 3.62 per cent.
Historical size of Invesco Perpetual High Income since Nov 2010
Source: FE Analytics
The biggest criticism levelled at multi-billion pound funds is their poor liquidity, and questionable ability to cope with mass redemptions.
When a fund holds a major stake in a company and is then forced to sell, there must be enough end buyers to ensure that the manager can meet redemptions for everyone pulling their money out.
If there are not enough buyers, this can result in investors being trapped in a fund that they are desperate to sell, as was the case during the financial crisis with a number of illiquid property products.
Looking at the performance of the two Invesco Perpetual funds since 15 October, it appears that Woodford (pictured) and Invesco have handled the outflows very well.
Both funds are ahead of their benchmark and sector average over the period and it is important to note that Invesco Perpetual Income – which has received the bulk of redemptions – has performed better. Income and High Income are also ahead of Mark Barnett’s Invesco Perpetual UK Strategic Income fund, which prior to Woodford’s announcement was the most similar to it on a risk/adjusted return basis over the past five years.
Barnett, also an FE Alpha Manager, is set to take over from Woodford as manager in April next year.
Performance of funds, sector and index since Oct 2013
Source: FE Analytics
FE Research’s Charles Younes says that Woodford’s bias towards mega cap stocks has ensured that the redemptions have not been a big issue, as the likes of AstraZeneca, GlaxoSmithKline and British American Tobacco are among the most liquid and frequently traded in the market. He gave this exact prediction in an FE Trustnet article earlier this month.
Younes adds that the team’s willingness to increase its cash exposure to cope with the outflows has possibly helped as well.
He believes that there could be further outflows from the two funds in the coming months, but does not think that investors should consider selling them for this reason alone.
"I think there could be more outflows in the New Year for sure," he said. "Most people don’t tend to make a knee-jerk reaction to something like this and prefer to give it some time to consider the situation."
"At FE Research, for example, we are currently reviewing Invesco Perpetual Income’s place on the FE Select 100 list."
"At the moment, a lot of investors will be window shopping and might take January as a good excuse to revamp their portfolio."
"The fact the funds have so far coped well with redemptions does bode well, though, for those initially concerned about what affect these could have."
"I don’t think that those thinking about selling should be doing so because of future redemptions, but more because of the change in manager. They’ll be thinking about whether Mark Barnett can fill Woodford’s shoes."
Rob Morgan, fund analyst at Charles Stanley Direct, agrees that there could be further outflows from the funds. He is more concerned than Younes, believing that Invesco Perpetual could face a big problem in the next couple of years.
"I think the time to be worried is when Woodford announces what his next step is," he said.
"If he does take over another UK equity income fund, you’re going to see a lot of people follow him, and I’d expect a lot of money to come out. I would expect to see the bulk of outflows then."
"At the moment there aren’t a huge number of alternatives out there, so that’s why you’ve seen a lot of investors sit on their hands."
Morgan agrees that the bulk of the portfolio will probably be unaffected by outflows, but he is more concerned about Woodford’s unquoted positions.
"He has a venture capital tail which is at around 5 per cent," Morgan explained. "If there are a lot of outflows and that rises to 10 per cent, I think that’s when you need to be worried."
"These are tiny companies and obviously very hard to trade. You’d have to see massive outflows for this to happen and we’re a long way from it now, but it’s a risk."
Invesco Perpetual confirmed yesterday that it had begun selling out of some of Woodford’s smallest positions, perhaps in anticipation of the concerns outlined by Morgan. All of his shares in medical property company Assura Group have been sold, and Invesco has also begun selling down its stake in Provident Financial and Drax.
Morgan says he foresaw this venture capital risk even before news of Woodford’s resignation, and holds Barnett’s UK Strategic Income fund as a result.
Barnett and Woodford have a very similar style, currently focusing on stable dividend payers with predictable earnings. The former explained his outlook for 2014 in a recent interview with FE Trustnet.
Although Woodford is perhaps the bigger name, it has been Barnett who has returned more in recent years.
Our data shows that the Invesco Perpetual UK Strategic Income fund has beaten both of Woodford’s funds since he started running it in early 2006, as well as over one, three and five years.
His fund has been more volatile, though.
Performance of funds, sector and index over 5yrs
Source: FE Analytics
All three funds have ongoing charges of around 1.7 per cent and are available across all major platforms.
