The group announced today that the top performing £13.4bn fund – which is headed up by FE Alpha Manager Mark Barnett – would move sectors at the end of the month, but also hinted that Barnett’s Invesco Perpetual Income fund would follow suit later in 2014.
Barnett (pictured) took over both funds earlier this month, as they had been run by star manager Neil Woodford, who announced he would be leaving Invesco Perpetual after 25 years to set up his own fund management firm. Barnett’s Invesco Perpetual UK Strategic Income, which he has managed since January 2006, is also likely to make the switch.
Ian Trevers, head of UK retail at Invesco Perpetual, says that investors should not be concerned about the change of sector as the funds will still be managed in the same way.
"The long-term balance between income generation and capital growth is the hallmark of successful equity income investing,” Trevers said.
“Over many years our equity income funds have delivered a significant income stream to investors as well as substantially growing their capital.”
“We believe that the interests of clients in these particular funds are best served by us continuing to focus on providing a growing level of income, balanced with the opportunity for capital growth over the long term.”
He added: “We are comfortable that these three funds will have a different IMA classification.”
Invesco Perpetual has a stellar track record in the IMA UK Equity Income sector.
According to FE Analytics, it has been the sector’s top performing portfolio over 10 years with returns of 200.42 per cent. As a point of comparison, the FTSE All Share has returned 130 per cent over that time.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
However, due to its exposure to large, often defensive companies, it has lagged in the recent rally which has led the fund to underperform the sector over five years.
Invesco Perpetual High Income currently has a yield of 3.22 per cent, which is the eighth lowest in the sector. However, the fund’s net distribution has increased in each of the last three years.
However, to qualify for the IMA UK Equity Income sector a fund needs to distribute an income which is 110 per cent more than FTSE All Share.
The IMA sector definition states that “To ensure compliance with the intended 110 per cent yield, funds in the sector will be tested over 3 year rolling periods by taking a simple average of the yield figure achieved for each fund at its year end.”
It adds that “Funds that fail to meet the 110 per cent average yield for each 3 year rolling period will be removed from the sector.”
Whether or not the fund was forcibly removed from the sector is still unconfirmed.
Invesco Perpetual High Income is not the first to switch into the IMA UK All Companies sector because of the equity income sector’s yield target.
FE Alpha Manager James Henderson also moved his five crown rated Henderson UK Equity Income & Growth fund out of the IMA UK equity Income sector last year as he didn’t want to be constrained by its requirements.
He also told FE Trustnet earlier this year that investors are putting their money at risk if they stick rigidly to a yield target as it could well be a value trap.
That is because, according to the manager, stocks with a high dividend yield are usually the most out of favour – but could be out of favour because that yield isn’t sustainable.
“The discipline of selling the lower yielding shares and buying the higher yielding shares works when the higher yielding shares have been dismissed by investors as boring or too cyclical,” Henderson said.
“But this is not the case at the moment. Given low interest rates, there has been a concentrated effort by fund managers to find good high-dividend companies.”
He added: “The space is in danger of becoming overcrowded.”
Despite the fact it has changed sector, Henderson UK Equity Income and Growth has vastly outperformed the IMA UK Equity Income and UK All Companies sector – as well as the FTSE All Share – over the last 12 months.
Performance of funds vs sector and index over 1yr
Source: FE Analytics
Ian Trevers says, although they are changing sectors, investors in the Invesco Perpetual equity income funds can expect performance to be equally good as it has been in the past.
“Our clients and their advisers can be confident that this sector change will not impact the way their investments are managed,” he said.
Invesco Perpetual High Income’s clean share class has an OCF of 1.19 per cent.
Next week FE Trustnet will be following this story up by looking at what it means for the sectors, IP High Income’s competitors and unit holders in the fund.
