Woodford left Invesco Perpetual in March after 25 years’ service and will soon be launching his new group’s first offering – the CF Woodford Equity Income fund – which is expected to be run in a very similar manner to his previous ventures Invesco Perpetual High Income and Income. Oliver (pictured) rates both Woodford and incoming manager Barnett, but having met with Invesco Perpetual on multiple occasions, he says he will be sticking with the group that has already brought so much success to investors.
To mitigate the risk of potential outflows, Oliver says he is switching out of the £7.8bn Invesco Perpetual Income fund, which has been one of his long-term holdings, and into Barnett’s five crown rated Invesco Perpetual UK Strategic Income portfolio.
“We have done a lot of analysis, a lot of speaking with Invesco – we have met with Mark Barnett a good four or five times – and a lot of operational due diligence. We had two major concerns: firstly, what sort of support would be given to Mark because clearly he has taken on a huge amount of money and a number of new mandates,” Oliver said.
“The second thing we considered was what would happen to the small and unquoted companies in the Income fund.”
“What we have decided to do is to stick with Invesco Perpetual, but we have switched the money out of the Income fund in the UK Strategic Income fund which was Mark’s previous mandate anyway.”
As well as Barnett, Invesco boasts highly-established UK managers such as Ciaran Mallon and FE Alpha Manager Martin Walker, who run Invesco Perpetual Income & Growth and Invesco Perpetual UK Growth, respectively.
That said, he stresses that Cannacord is interested in investing in funds first and foremost, not managers. Oliver believes the cult of the star manager can sometimes cloud investors' judgement.
“We are going in with a completely open-mind and we are sticking with Invesco, as long as it remains the fund that we bought it for,” he said. “Yes Neil and Mark are good managers, but for us it is as much about the fund’s structure and how it is incorporated into our portfolios as opposed to just the manager.”
Early estimates suggest that Woodford’s new fund could finish the month as large as £5bn, much of which is expected to come directly out of Invesco Perpetual Income and High Income. While both are smaller than they were one year ago [High Income has shrunk from £14bn to £13bn and Income has shrunk from £10.7bn to £7.8bn] more outflows are anticipated over the coming months.
Oliver is unsure whether Barnett will have to deal with large-scale outflows from his High Income and Income funds, but he says he doesn’t want to take the risk and his happy with his decision to use the much smaller UK Strategic Income fund.
“Switching to Strategic takes out one of our concerns; in other words, what will happen to the small and unquoted companies, because he isn’t invested in that area in that fund,” Oliver said.
“Also, we have confidence, having spoken with Invesco, that he has a large team behind him with plenty of strength and depth who may not have been advertised as much when it was just the Neil Woodford show.”
According to FE Analytics, the £439m Invesco Perpetaul UK Strategic Income fund has been the second best performing portfolio in the IMA UK Equity Income sector since Barnett took over in January 2006, with returns of 115.14 per cent. It has beaten the FTSE All Share by more than 40 percentage points in the process.
It has outperformed both the Invesco Perpetual High Income and Income funds over that time, too.
Performance of funds vs sector and index since Jan 2006
Source: FE Analytics
Barnett’s relatively high weighting to FTSE 250 companies will be one of the major reasons why his fund outperformed Woodford’s old portfolios as the index has surged since the period after the 2008 financial crash.
Nevertheless, Oliver expects Barnett (pictured) to be able to continue to perform in that manner over the coming years.
He also warns investors who are buying Woodford’s new fund that it will be difficult for the star manager to replicate his stellar performance at Invesco Perpetual because he will be starting with a much larger pool of assets than he did back in 1988.
Performance of fund vs index between Feb 1988 and Mar 2013
Source: FE Analytics
“The diplomatic answer is, he needs to prove himself all over again,” Oliver said.
Though Oliver is happy with his decision, he says he reserves the right to change his mind over the next six to 12 months as the outlook for both Barnett’s fund and CF Woodford Equity Income is so unknown.
“We will probably have a slightly shorter investment horizon than we would otherwise and that has to be natural because there is so much uncertainty,” he said.
“It’s an imponderable decision in a way. The decisions we were faced with were; do we sell Invesco completely and buy another defensive fund? Sometimes, finding that alternative fund is easier said than done.”
“Do we stick with Invesco? That’s a possibility, but then there are the potential risks of assets flowing out. Or, do we go to Woodford? The problem there is that he has attracted so much money.”
He added: “If it was going to be a £150m fund, then we would have had a look, but estimates are that it will be close to £5bn.”
Oliver's decision is identical to that of Andrew Alexander, head of investment at Three Counties, who said that the Invesco Perpetual UK Strategic Income fund gives investors all the expertise of Barnett without the risk of inflows impacting performance.
For those interested in following Oliver and Alexander, Invesco Perpetual UK Strategic Income’s clean share class has ongoing charges of 1.17 per cent and currently yields 3.37 per cent.
