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Gleeson: Invesco’s flagship income funds are back on track

30 July 2014

It’s been a very difficult period for two of the UK’s best-known and most popular open-ended funds, but the head of FE Research thinks there will be calmer times ahead.

By Joshua Ausden,

Editor, FE Trustnet

The worst of the redemptions are behind Mark Barnett’s Invesco Perpetual Income and High Income funds, according to head of FE Research Rob Gleeson, who is considering upgrading the latter to a “buy” on the FE Select 100 list.

ALT_TAG Neil Woodford’s decision to leave Invesco back in October 2013 prompted the team to downgrade the Income fund to a “hold”, due to fears over outflows.

Gleeson notes that first Woodford and then Barnett (pictured) have handled the exiting money very well, though the redemptions weren’t as much as many people feared.

With Woodford’s new venture now up and running, Gleeson says he and his team no longer see flows as an issue.

“Our analysis showed us that the strategy would be able to handle outflows of up to a third, but beyond that, we thought performance could be impacted,” he said.

“Initially investors pulled out their money very aggressively with some big one-off redemptions. I think many expected there to be a big spike after Woodford launched his new fund in June, but the pace has definitely slowed throughout the year.”

“Redemptions never breached the one-third mark, and given that Woodford’s fund is up and running, we think the worst is behind Invesco Perpetual Income. With this in mind, we are considering upgrading the fund to a 'buy' again when we review the FE Select 100 in September.”

Gleeson says he has always backed Woodford's and Barnett’s abilities, but felt outflows of more than a third would make it very difficult for them to sell out of smaller positions at the bottom end of the portfolios, which could hamper performance.

Early indications were very worrying for Invesco, with the Income fund in particular seeing big one-off redemptions from institutional investors.

However, flows from Invesco Perpetual High Income were less significant, even though it’s a much larger portfolio.

Invesco Perpetual has confirmed that the combined size of Income and High Income has fallen from £24.5bn when Woodford announced his departure to £19.9bn at the time of writing, though this figure includes market movements.

The FTSE is up around 6 per cent over the period, while the Income and High Income funds are up around 9 per cent.

The total size of Invesco Perpetual Income has fallen from £10.1bn in October in 2013 to £7bn at the time of writing, meaning that redemptions have indeed been just over one third.

However, as High Income has only fallen from £13.9bn to £12.9bn, the entire Income/High Income mandate has seen net redemptions of less than a quarter.


Invesco Perpetual Income and High Income are ahead of their sector and FTSE All Share benchmark since 15 October 2013, year-to-date and since Barnett officially took over in March 2014.

Performance of funds, sector and index since 15 Oct 2013

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Source: FE Analytics

FE Research has rated Barnett’s Invesco Perpetual UK Strategic Income fund as a “buy” throughout the process, and it too is outperforming over the periods in question.

Ian Trevers (pictured), head of retail at Invesco Perpetual, points out that there have been net redemptions from the two funds since May 2011, more than two years prior to Woodford’s decision to leave.

ALT_TAG While outflows spiked significantly at the back-end of last year and the beginning of this year, he says the pace is returning to a more normal level.

“We haven’t seen a spike this year. We didn’t know what we were going to see and remained flexible, but we haven’t seen a pick-up in redemptions in the last couple of months,” he said.

He says he is particularly pleased by the volume of financial advisers sticking by Income and High Income, with the bulk of outflows coming from big institutional investors and funds of funds.

“We have lost between 10 and 15 per cent of adviser money, and just over 10 per cent of retail,” he said.

“The redemption rate for advisers is now down towards the industry average.”

Barnett himself added: “The [second wave] hasn’t happened. 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.”

Trevers says the strong performance of funds in spite of the sizeable outflows vindicates the firm’s decision to keep the funds open to new money.

One of the big arguments against giant funds is the difficulty they face in managing redemptions.

“The ability to run large funds is a distinctive characteristic of the most successful fund management firms,” Trevers said.

Though the pace of outflows has slowed, Invesco Perpetual Income and High Income are still among the funds with the largest outflows over the past three months according to FE data.

Income has had £1.4bn pulled, while High Income has seen just over £500m.

Barnett remains cautious in his outlook for UK equity markets, believing that the strong gains made by the FTSE and UK equity income funds in recent years are unlikely to be replicated.

He thinks the FTSE 100 could well pass its all-time high in the coming months, but only if the strength of the pound starts to subside.

“I still think the market will make a positive return, but not to the same extent as it has in recent years,” he said.

“We’ve seen some fantastic capital returns, but I think there will now be more of a balance between growth and income in the coming years. When the starting valuation is higher, then the projection for future returns is lower.”


Performance of indices over 3yrs

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Source: FE Analytics

“Yes, I think the FTSE could break the high, but currency is the headwind at the moment. Currencies have affected earnings, which have been lacklustre. We need earnings growth for the market to keep going up.”

Dividend growth in the second quarter of this year was much worse than many expected, thanks in no small part to the strength of currency.

Dividend growth is central to Barnett's process at Invesco, and he says that he’s confident the stocks he owns will weather any setbacks.

“Even Glaxo, which recently reported a lower earnings number, has been able to grow its dividend by 6 per cent,” he said.

“This has come from a high starting yield as well.”

“Clearly there are some areas that might struggle, particularly those with a dollar bias.”

“Do I think bank growth will be as good as it has been? Probably not. Potentially the mining sector could also struggle.”

“I also worry about the oils. I own BP, which is niggling away a bit. I do think aerospace and defence will be ok, though.”

Invesco Perpetual Income and High Income have ongoing charges of 0.91 and 0.92 per cent, respectively.

Under Woodford, they were the best-performing UK Equity Income funds by some distance, returning more than 800 per cent in the 20 years to his departure in March this year.

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