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The new rivals to Invesco Perpetual High Income

09 April 2014

The sector-shift of one of the largest and highest profile funds in the UK raises questions over how it should now be analysed.

By Thomas McMahon,

News Editor, FE Trustnet

Invesco Perpetual High Income has outperformed almost all comparable funds in the IMA UK All Companies sector on a total return basis over three years, according to data from FE Analytics.

The decision of Invesco Perpetual to shift the £13.5bn Invesco Perpetual High Income fund into the IMA UK All Companies sector has left investors with the problem of knowing which funds to compare it to.

Invesco took the decision as it became clear that the fund would be ejected for the sector thanks to not meeting the yield requirements in the IMA UK Equity Income sector, but it will retain its income mandate.

Chase de Vere’s Patrick Connolly said: “The fund is in no-man’s land because it’s still effectively an equity income fund but it’s not in that sector, but at the same time it’s very different to the other funds in the UK All Companies sector.”

The Invesco fund could eventually end up being housed with a number of fallen equity income funds, as a handful of funds are at risk of falling foul of the yield target. In fact, the IMA may end up reviving the Income & Growth sector which existed until 2010.

“This is a bigger issue than just Invesco and so it will be interesting to see what the IMA does to try to resolve it,” Connolly said.

One solution in the meantime is to compare the fund those in the IMA UK All Companies sector with a yield and strategy that make them comparable to the Invesco fund.

There are a number of funds in the sector which target both income and growth, and FE Alpha Manager Mark Barnett’s Invesco Perpetual High Income comes out very well indeed on our figures.

HSBC UK Growth & Income targets growing income and capital and is yielding 3.25 per cent. However, on a total return basis the fund hasn’t been so successful in recent years.

The fund has produced third quartile returns over three and five years and slipped into the fourth quartile over 12 months.

The fund’s yield is marginally ahead of the 3.22 per cent currently paid out by Invesco Perpetual High Income but the latter is well ahead on a total return basis.

Performance of funds vs index over 3yrs

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Source: FE Analytics

Jupiter Responsible Income is yielding 3.2 per cent but has also underperformed the Invesco fund over the same period with returns of 42.07 per cent to Barnett’s 47.85 per cent.

Chris Watt’s £64m portfolio is highly rated, having won five FE crowns, but operates in a niche area in that it has an ethical overlay to its selection process.

The fund avoids companies involved in tobacco, the arms trade, nuclear power and animal testing. Tobacco is one of the most-held sectors among UK equity income managers.


JPM UK Strategic Equity Income has a more orthodox approach but is yielding a comparable 3.16 per cent. The fund has been less successful than Barnett’s over three years, returning 34.92 per cent to investors.

Performance of funds vs index over 3yrs

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Source: FE Analytics

The best-known of the new rivals is the £537m Henderson UK Equity Income & Growth fund run by FE Alpha Manager James Henderson, which yields 3.1 per cent. It is the only fund to outperform the Invesco portfolio over three years.

ALT_TAG Like Barnett (pictured), Henderson moved his fund into the sector before being pushed, refusing to buy stocks he felt were overvalued in order to chase a headline yield.

Henderson warns that many of the highest yielding areas of the market are “value traps”, meaning that they are cheap for a reason and will destroy shareholder wealth.

FE Research analyst Charles Younes said: “Henderson is offering an original product for anyone considering investing in UK equity income.”

“He places a strong emphasis on dividend growth when analysing companies and does not hesitate to stray away from the typical large UK firms paying high and sustainable dividends.” “This riskier approach also means the fund’s income policy is less stable than that of its peers, but it also helps him to invest in under-researched areas, typically UK smaller companies.”

“This fund could therefore be viewed as a complementary product to some of the popular choices in the UK Equity Income sector.”

It is notable that the passive tracking funds in the IMA UK All Companies sector are yielding comparable numbers to the Invesco fund and its new peers, underlining that the managers of these funds have been making an active decision to avoid some of the highest yielding areas.

The Vanguard FTSE UK All Share Tracker is yielding 3.24 per cent, for example, more than all but one fund examined in this article.

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Source: FE Analytics


However, it is noticeable that the Invesco portfolio, run by FE Alpha manager Neil Woodford for most of this period, has underperformed most of the comparable funds over five years.

In the 2009 recovery many funds made a lot of money by investing in battered valuations in more cyclical areas which the income and large-cap focused Invesco perpetual fund was unable to do.

Over 10 years the fund would have been top decile in the whole sector, however.

There are also a number of growth funds that are paying a decent yield in the IMA UK All Companies sector, although given that they don’t have generating an income in their mandate they may not be the best option for investors in the long run.

FE Alpha Manager John Wood’s £1.3bn JOHCM UK Opportunities is yielding 3.04 per cent. The yield is a result of the manager’s defensive approach which leads him into the type of sector where yields are higher and share price movements generally slower.

Such is Wood’s caution that his cash weighting is near its maximum, according to FE Research analyst Amandine Thierree.

“The investment process has been designed to provide positive returns regardless of the economic environment and the fund tends to do better in falling markets than in rising ones,” she said.

The fund has made 39.15 per cent over three years, ahead of the FTSE All Share but behind Invesco perpetual High income. Wood has 19 per cent in cash and 20.5 per cent in the services sector.

The £31m Threadneedle UK Growth is yielding 3.1 per cent but is another not to explicitly target a yield. It is another to have produced second quartile returns over three years.

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