Barnett (pictured) took over the £13.4bn Invesco Perpetual High Income and £8.4bn Income funds from Woodford in March, having built up a strong record during his eight years as manager of the five crown rated Invesco Perpetual UK Strategic Income fund.
Performance of fund versus sector and index since January 2006
Source: FE Analytics
Woodford was renowned for taking large off-benchmark positions in the companies he rated and Barnett says that while some of those stocks have underperformed over recent months – such as AstraZeneca, Centrica and SSE – he will be maintaining a high level of exposure to them as they are the type of businesses that can grow their dividend in a reliable manner.
“We believe there are areas of the UK equity market that continue to look attractive,” Barnett said.
“The fund is positioned with a focus on companies which we believe can grow revenues and profits in a low growth world, coupled with management teams that are focused on delivering sustainable, long term, dividend growth.”
With that in mind, the FE Alpha Manager gives his outlook on three of his largest, inherited, sector bets.
Healthcare
Barnett has been given a very large weighting to pharmaceutical companies.
For instance, healthcare giants GlaxoSmithKline and AstraZeneca make up 17.14 per cent of his Income fund and 19.04 per cent of his High Income. Overseas stocks such as Roche also feature in both portfolios.
The manager says he is particularly bullish on AstraZeneca, which as FE Trustnet highlighted earlier this morning, has had a spike in its share price on the back of a possible take-over from US firm Pfizer.
Despite that, shares in Astra have performed poorly recently as our data shows the stock has lost money over the last three months.
Performance of stock versus index in 2014
Source: FE Analytics
However, Barnett – whose comments were made before the news of a possible take-over – says the company’s future looks good.
“The stock market’s retrenchment in March saw a fall in the price of some of the recent strongly performing shares, notably including the fund’s major holdings in BT Group, Capita and AstraZeneca,” Barnett said.“This was despite continued positive news for AstraZeneca.”
“The company confirmed it had completed patient enrolment four months ahead of plan in the Phase III clinical trial for Brilinta tablets and that enrolment was underway in two additional Phase III studies.”
Other UK equity income funds such as Schroder Income, Jupiter Income and Fidelity MoneyBuilder Dividend also have large exposure to Astra.
Tobacco
“The tobacco sector, meanwhile, continued its recent improved performance,” Barnett continued.
Tobacco, like healthcare, is another of Woodford – and now Barnett’s – biggest sector bets. Combined, Imperial Tobacco and British American Tobacco make up 10 per cent of both of Barnett’s new Invesco Perpetual Income funds.
Having been a stalwart for investors seeking a reliable dividend, a number of managers have warned that the tobacco sector faces both political and social pressures as a result of the growing concerns about the health implications of smoking.
However, Barnett still expects the likes of Imperial Tobacco and British American Tobacco to continue to perform well, despite plans to enforce plain packaging on cigarettes.
“Data from Australia showed that there had been minimal effect on consumption from the first year of plain packaging,” he said.
“There had been a rise in the level of illicit cigarettes sold. Furthermore there were signs that significant volume declines in Western Europe were levelling out.”
“The UK government resurrected the possibility of plain packaging in the UK last November, when it ordered a review of the evidence on its effectiveness and since month end has announced that it is “certainly minded” to oblige cigarettes to be sold in plain packets, without giving a firm date for doing so.”
The five crown rated JOHCM UK Opportunities fund, which is headed up by FE Alpha Manager John Wood, is another portfolio which holds both Imperial Tobacco and British American Tobacco as top 10 holdings.
Energy
Woodford had also been a big fan of the UK’s energy sector and has passed on large holdings in FTSE 100-listed companies SSE and Centrica to Barnett.
It is a sector, however, that has come under intense political scrutiny over recent months with Ed Miliband declaring he would freeze energy prices if he and the Labour Party were to win the next general election – an announcement which was lambasted by Woodford last year.
Shares in both SSE and Centrica sold-off because of the announcement. Though, as the graph below demonstrates, they have both begun to recover.
Performance of stocks versus index over 1yr
Source: FE Analytics
Barnett says he is happy with his exposure to the UK’s energy sector and expects that upward share price movement to continue, especially in regards to SSE.
“Both companies’ shares have subsequently shown some recovery. SSE announced its own price freeze last month. This news was followed by news from Ofgem of a full competition industry review,” Barnett said.
“This was well received by the stock market – the referral by Ofgem of the industry to the Competition Commission noted that there is no meaningful evidence of wrong doing or excessive returns, but just that some elements of the market are not functioning optimally.”
“We expect the review to conclude that industry returns are not excessive, while moves such as that by SSE are already addressing the political agenda of pricing and transparency of margins.”