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Barnett’s first year: How he got on with Woodford’s old funds

22 January 2015

FE Trustnet takes a look at how the star manager has fared since stepping into Neil Woodford’s shoes this time last year.

By Daniel Lanyon,

Reporter, FE Trustnet

Almost 12 months ago the UK’s best known fund manager and FE Alpha Manager Neil Woodford was winding up his affairs at Invesco Perpetual, the fund management group at which he had worked for 25 years.

Fellow FE Alpha Manager Mark Barnett (pictured) was presumably gearing up at this point to take responsibility for Woodford’s largest funds, having made his names running the Invesco Perpetual UK Strategic Income and several investment trusts.

Initially, he was appointed to Woodford’s £1.1bn Edinburgh Investment Trust on 28 January 2014 before being named as sole manager of the £6.6bn Invesco Perpetual Income and £12.6bn Invesco Perpetual High Income funds on 6 March.

This makes it almost a year since the manager took over Woodford’s £30bn portfolio. While this period is not enough time to give full credence to the manager’s ideas, it has encompassed a period of market turbulence that could prove enlightening when evaluating Barnett’s performance so far.

While the year ended on a positive for the FTSE All Share, it managed this only in the final few weeks as much of 2014 was spent in negative territory as it was in positive.

The two open-ended funds that Barnett inherited from Woodford have given investors some solid performance since the manager took over. While the FSTE All Share has been broadly flat and the average return in the IA UK All Companies sector was a loss of 1.66 per cent, both funds are up more than 8 per cent over Barnett’s tenure on the portfolios.

Performance of funds, sector and index since 6 March
  

Source: FE Analytics

This puts the funds in the top decile of their sector during 2014 while also scoring in the top 10 per cent for volatility. Meanwhile, an investor who had put in £10,000 at beginning of 2014 would have received an income of a little more than £375 from each fund, giving a yield of 3.75 per cent.

Income earned in 2014 from £10,000



Source: FE Analytics


The Edinburgh IT has done even better over since 6 March from a capital growth point of view, with returns of 9.52 per cent. Since Barnett took over the trust at the end of January it is up 17.29 per cent, while the average fund in the IT UK Equity Income sector returned 4.33 per cent and the FTSE All Share gained 4.37 per cent.

Performance of trust, sector and index since 28 January 2014



Source: FE Analytics

Barnett’s first year was no doubt a busy one, having to reassure investors about his intentions for the highly popular funds and coping with the inevitable outflows, at the same time as reshaping the portfolio to reflect his own ideas.

FE Analytics shows the shape of the portfolio has changed considerably since the manager took over. Healthcare stocks, which at times under Woodford (pictured) surpassed one-third of assets, currently sit at around 25 per cent, while the financials weighting has been boosted from 10 per cent to 21 per cent.

He’s also trimmed the fund’s exposure to utilities and taken the weighting to services companies to 5.6 per cent, up from less than 1 per cent when he took over.

Gill Hutchison, head of investment research at City Financial, says she highly rates Barnett’s first year of new responsibility.

“We believe that Mark Barnett has handled the challenges of this transition period well. Given his history as a key member of the team and his working relationship with the previous manager, he has an innate understanding of the expectations of the investor base and he has placed his own stamp on the fund without altering the overarching total return approach,” she said.

“We highlight that historically, Mr Barnett’s approach to portfolio construction is characterised by greater sector and stock diversification, as well as a tendency to invest more meaningfully in mid-cap stocks.”  

“As has always been the case, little heed is paid to the structure of the UK index in the fund’s construction and therefore, its risk and return profile is expected to remain markedly different from that of the index. Given the emphasis on delivering an attractive total return, the fund typically displays lower absolute risk features and this distinguishes it amongst its peers.”

Barnett somewhat demonstrated his ability to match Woodford’s reputation for portfolio strength even when markets are turbulent, with losses in his funds and investment trust lower than index and sector during last September’s market correction.

The three vehicles have also shown further strength by rebounding faster than the index and peers with the Edinburgh IT doing particularly well since markets bottomed out.

However, an inspection of the three‘s largest holdings shows the similarity of Barnett’s’ stock selection across the portfolio.

The combined top 10s of the three funds include just 13 stocks, with BAT, AstraZeneca, Roche Imperial Tobacco, BAE, BT Reynolds American and GlaxoSmithKline the largest positions across the portfolios.

Invesco Perpetual Income and High Income also share top holdings in Capita. Edinburgh IT, meanwhile, opts for Atria and Reckitt Benckiser.


These similarities, as well as the individual stocks within the portfolios, will come as no surprise to most due to Barnett’s penchant for blue-chip names with a longstanding interest in tobacco and pharmaceutical mega-caps, a characteristic he shares with Woodford.

In fact Woodford’s current top 10 in his CF Woodford Equity Income fund is remarkably similar. The only difference, apart from weightings, between CF Woodford Equity Income and Invesco Perpetual High Income is the former’s position in Rolls-Royce, which is present instead of BP.

Thomas McMahon, fund analyst at FE Research, said: “Invesco Perpetual Income has outperformed by roughly 7.5 per cent since Barnett took over. Many managers bought into the energy and materials sectors last year looking for value, but Barnett stayed out and this was a major contributor as they turned out to be classic value traps – areas that seem to be cheap but keep getting cheaper. There are other value traps he also avoided such as Tesco.”

“Overall stock selection has been very good and has been the major reason for his outperformance, continuing his track record on Invesco Perpetual UK Strategic Income, a portfolio with similar aims which he has run since 2006. His style and performance so far is consistent with his excellent results on that portfolio and more than justifies his investors in sticking with the fund after his predecessor left.”

 
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