Barnett (pictured) says making the funds less reliant on a handful of stocks for performance was his “number-one priority” when he took over on 6 March 2014.“I’ve never been entirely confident with holdings of more than 6 per cent in one company. I think this is sufficiently big enough to have in a single stock,” said the FE Alpha Manager in an exclusive interview with FE Trustnet.
“I had 9.5 per cent in two companies when I inherited the funds.”
“It was a desire for me to broaden the concentration of the 30, 40, 50 biggest companies. To help me do that, I’ve taken some money out of some of the largest holdings.”
Barnett diluted his position in GlaxoSmithKline and AstraZeneca as soon as he took over the £12.9bn Invesco Perpetual High Income fund.
By the end of March, they had an 8.72 and 8.81 per cent position, respectively. By the end of June, the weightings were down to 6.45 and 6.08 per cent.
As the table below shows, weightings in the likes of Roche, BAE Systems and Capita – which is no longer a top-10 holding – have also come down.
Source: FE Analytics
As a result, the fund’s top-10 now accounts for a lesser proportion of total assets.
At the end of March, the 10 largest companies had a 56.55 per cent weighting, while the figure at the end of June stood at just over 50 per cent.
Barnett says that this figure could continue to fall.
“I don’t target this specifically – it is just a result of my bottom-up stockpicking,” he said.
“Over time, my Strategic Income funds have been even less correlated, and you will see that in these funds – the concentration of the top-10 and top-20 will be lower.”
Barnett’s decision to reduce stock-specific risk has already had its benefits.
GlaxoSmithKline suffered a sharp sell-off at the back end of last week in light of an earnings downgrade, but the falls were less costly for investors in Invesco Perpetual High Income than they would have been if the manager still had a 9.5 per cent position.
“Glaxo is still a very large holding, but the impact from last week was more muted than it would have been three of four months ago,” he said.
“I haven’t sold anymore. It is a very cheap asset in its own right. Glaxo has a very strong balance sheet, has been involved in some very interesting deals recently – notably with Novartis – and has very attractive cash flow.”
The manager points out that the stock is still in great shape to raise its dividend, in spite of the recent negative news flow.
Barnett has used the money generated from sales at the top of the portfolio to buy a number of new positions, including Legal & General, Compass Group and Babcock.
Part of the reason why Invesco Perpetual UK Strategic Income has returned more than Invesco Perpetual Income and High Income in recent years is the former’s greater weighting to the FTSE 250.
Woodford’s departure led to significant outflows in the early months, though the pace of redemptions has slowed down since then.
Barnett says he has refrained from taking money out of a number of mid caps, which has in turn caused their weighting as a proportion of total assets to increase.
Invesco confirms that mid cap exposure has risen from 13.1 per cent to 14.8 per cent in High Income, and from 13.6 per cent to 16.5 per cent in Income.
While Barnett has moved to make the fund less concentrated at the top of the portfolio, he says it is also his plan to reduce the total number of stocks.
Invesco Perpetual High Income currently has just over 120 holdings, compared with around 77 for the Invesco Perpetual UK Strategic Income fund.
“I’m keen to get a shorter list, though it won’t be as short as Strategic,” he added.
Barnett has already sold down some of his exposure to small positions in unquoted micro-cap names that proved popular with Woodford in recent years.Speaking more broadly about the differences between himself and Woodford, Barnett says that his predecessor perhaps focuses more on the macro than he does.
“I don’t think there are significant differences. I am a fundamental analyst and am focused on understanding businesses, looking at how the numbers shape up in terms of cash-flow, dividends and so on,” he explained.
“I see myself as a long-term investor and working with management, and in that way the process has not shifted markedly.”
“If anything, I’d say I’m slightly less [macro-driven]. The macro is a good starting point, but bottom-up analysis is crucial. There are some instances when taking only a bottom-up view is more effective, even though it doesn’t conform to the top-down view.”
All-in-all, Barnett says he is pleased with the job he has done so far, though admits there is still work to be done.
“It’s getting closer, yes. I couldn’t say the job is finished. The destination I want to get to isn’t a fixed point because things change,” he said.
“Whether I’m 100 per cent happy is a moot point. I’m very happy with the portfolio as it is today, as I am with the Strategic Income fund.”
While the manager points out he is a long-term investor and should be judged on a three-year basis at the very least, he says he has been encouraged by the performance of the fund since 6 March – particularly given that the team has had to contend with significant redemptions.
According to FE data, Invesco Perpetual Income and High Income are top-quartile performers in their IMA UK All Companies sector and ahead of the FTSE All Share since Barnett took over management, as well as year-to-date.
Woodford only started running his newly launched CF Woodford Equity Income fund last month, but SJP UK High Income – which he has run since 2001 – is ahead of Barnett’s funds over both time periods.
Performance of funds and index in 2014
Source: FE Analytics
Invesco Perpetual confirmed that the combined size of Income and High Income has fallen from £24.5bn when Woodford announced his departure in October last year, to £19.9bn at the time of writing.
The bulk of the outflows have come out of Invesco Perpetual Income, which is now just under £7bn in size after having been more than £10bn in October last year.
Barnett says the pace of outflows has slowed significantly in recent months, even though many industry commentators expected the launch of Woodford’s fund to cause a second wave.
“The [second wave] hasn’t happened,” he said. “We didn’t see a lot happen during the special offer period for Neil’s fund.”
“There have been some lumpy outflows at certain points, but day-to-day the level of flows has been very manageable.”
The manager said in an FE Trustnet article last month that the outflows have actually helped him reshape the income portfolios.
