Woodford will launch an income fund when he leaves Invesco in April, according to media reports, with his new venture to be called Woodford Investment Management.Morgan (pictured) says that the launch could lead to many investors in the Invesco funds pulling their money out to follow the manager, with knock-on effects for remaining unit holders.
“Many of those who have backed Woodford for years will want to follow him to his new outfit, and this could present challenges to Invesco Perpetual and the new manager of the Income and High Income funds, Mark Barnett,” he said.
“Should a large number of investors move their money out, it will force Barnett into selling significant quantities of stock, and given the size of the funds it could be difficult to offload holdings at attractive prices – especially in regard to smaller companies, which do form a minor but significant element of the portfolios.
“This has long been a risk of the Invesco Perpetual Income and High Income funds, and one reason we have favoured Mark Barnett’s Invesco Perpetual UK Strategic Income fund instead.”
When Woodford announced he would be leaving Invesco Perpetual there was widespread concern about the possible effect of outflows on the portfolio.
Fund houses have to sell stock to gather cash when unit holders want to redeem their units, and if a large amount is withdrawn at the same time, this can cause problems.
Managers may have to sell at low prices if buyers see them coming, and may also be forced to sell their best stocks because they are easier to sell at fair prices.
The leak of this information about Woodford’s plans may well see investors more inclined to leave Invesco as they will be able to buy a very similar product to the funds they flocked to under his stewardship.
Commentators that FE Trustnet has spoken to have underlined that the period when Woodford actually leaves could see a new flood of redemptions and this new information could make these outflows even higher.
Mark Dampier, head of research at Hargreaves Lansdown, told FE Trustnet last month that he thinks as much as half the money in the Income and High Income funds could leave when Woodford does.
However, Morgan thinks that investors shouldn’t be too hasty to withdraw their cash.
He notes that FE Alpha Manager Barnett, who will take over the funds in April, has a superior track record to Woodford's in recent years.
Performance of managers over 3yrs
Source: FE Analytics
Barnett’s Invesco Perpetual UK Strategic Income fund has a better record over three and five years, helped by its weighting to mid caps which would be impossible to maintain in a fund as large as the Invesco portfolios.
Barnett’s fund is the only one of the Invesco portfolios mentioned in this article that has beaten the FTSE All Share over five years at this point.
Performance of funds vs index over 5yrs
Source: FE Analytics
“There will likely be enormous press coverage about Neil Woodford’s new venture – and possibly scaremongering over what could be a large amount of money leaving Invesco Perpetual Income and High Income,” Morgan said.
“However, with portfolios of primarily blue chip high-yielding equities, for which many investors have an appetite currently, this should still be a relatively orderly transition to a more than capable fund manager.”
“Our view remains that Barnett’s patient long-term approach should continue to benefit investors across all of his funds – so think carefully about who you want to manage your investment rather than stampede for the exit.”
“We also believe Barnett is capable of doing a good job in terms of managing outflows,” Morgan added.
“He revealed in a recent interview that he had a plan regarding managing redemptions and that he would use it as an opportunity to reshape the portfolio to his liking.”
Barnett’s comments were covered by FE Trustnet in a previous article.
Although Morgan gives Barnett a vote of confidence, the verdict from FE’s AFI panel of leading IFAs is different.
The three indices – which represent the favoured funds by a panel of the country’s leading IFAs for aggressive, balanced and cautious investors – have been rebalanced this month, and Woodford’s funds have dropped off the list.
Invesco Perpetual Income and Invesco Perpetual High Income no longer appear on any of the three indices, although Barnett’s Invesco Perpetual UK Strategic Income fund does.
Fidelity Moneybuilder Dividend and Unicorn UK Income were the two new additions in the IMA UK Equity Income sector.
You can learn more about the AFI indices here.
