announced he was leaving Invesco Perpetual after more than 25 years’ service to set up his own investment management company.Given the performance of the star manager’s funds and the amount of money he was running, it is understandable why every financial publication covered the news in such great detail.
Let’s not forget that as manager of the Invesco Perpetual High Income fund between February 1988 and March 2014, he returned 2,403.95 per cent to his investors and therefore beat the wider UK equity market by more than 1,400 percentage points.
Performance of fund versus index between Feb 1988 and Mar 2014
Source: FE Analytics
Ever since more information about Woodford Investment Management has emerged and he eventually launched his CF Woodford Equity Income fund in June last year, there have been swathes of “exclusives” and general hype about his process, positioning and thoughts on the current market.
This excitement has now returned following the news of his second offering, the Patient Capital Investment Trust, which is set to launch over the coming weeks.
Now, before we get into the meat of this article, it must be made clear that we are by no means knocking Neil Woodford. Indeed, FE Trustnet covers the manager and his fund extensively.
Clearly, there is little doubt that he is deserving of his status as one of the best managers investors can buy and those who held his fund for any significant length of time over that 26-year period will be far wealthier as a result.
To have generated such a long and consistently successful track record is by no-means a fluke and his disciplined approach to dividend-paying stocks has meant he has been able to shield his investors from some of the biggest sell-offs the UK market has had to offer – think dotcom bubble when he stuck with “old economy” stocks and global financial crisis when he avoided banks.
But here we are going to focus on his successor at Invesco Perpetual, Mark Barnett, who has almost turned into a forgotten hero in the press over recent months.
Barnett had worked closely with Woodford and prior to replacing the star manager as head of UK equities at the group and as manager of the sizeable Invesco Perpetual High Income and Income funds, he had already built a strong track record himself.
He has managed the Perpetual Income & Growth Investment Trust since August 1999 and, using a similar contrarian/value style to Woodford, has delivered a 450.49 per cent return over that time while the FTSE All Share has gained more than 340 percentage points less.
Barnett was also handed the open-ended Invesco Perpetual UK Strategic Income fund in January 2006, over which time it has nearly doubled the index’s returns and has outperformed all but 21 of the 252 funds with a long enough track record within the IA UK Equity Income and UK All Companies sectors in the process.
Performance of fund versus sectors and index since Jan 2006
Source: FE Analytics
However, Barnett still faced a very daunting task when Woodford left and the press, including FE Trustnet, wrote about the significant issues he would potentially have to deal with.
First up were the possible outflows.
At his height, Woodford was running more than £30bn and questions were asked about how many of those investors were holding units/shares because of Woodford rather than Invesco Perpetual – especially as he would keep his same style and approach on the CF Woodford Equity Income fund. Therefore, the concern was that investors would be rushing for the exit at the same time.
Second was the number of portfolios he would be running.
Within a few weeks of taking up the post of head of UK equities at Invesco, Barnett (pictured) was – and still is – managing three open-ended funds and four investment trusts. While they are all run along similar lines and he is well-supported by an experienced team, dividing time between that many portfolios is no easy feat.
Thirdly, and almost more importantly, was his ability to manage those new portfolios.
While he had considerably outperformed his peers and even delivered stronger returns than Woodford as manager of his UK Strategic Income fund, he had done so with a heavier bias towards mid-cap in what was generally a good time to be in UK equities.
He certainly hadn’t run that amount of money before, so concerns were raised about whether he would be able to replicate his stellar returns now he was running billions and billions.
One thing for sure – he was hit by outflows. Close to £2bn came out of his now £13bn High Income fund over the first 12 months after the news of Woodford’s departure, according to FE data, while close to £4bn came out of his now £6.9bn Income fund over that period.
Also, FE Trustnet studies showed how 20 and 19 funds of funds had held Invesco Perpetual Income and High Income, respectively, as top 10 holdings in February 2014 and those figures shrunk to just eight and one in February 2015.
Despite those outflows and the fact that Barnett has had to do significant amounts of work to put his own stamp on his new funds, he has considerably outperformed.
FE data shows Invesco Perpetual Income and High Income have tripled the return of the FTSE All Share since Barnett has been in charge and are among the top 10 performing portfolios in both the IA UK Equity Income and UK All Companies sectors (which combined account for 358 portfolios).
Performance of funds versus sectors and index since March 2014
Source: FE Analytics
His Income and High Income funds have also been among the top eight performers for their maximum drawdown – which calculates the most an investor would have lost if they had bought and sold at the worst possible times – and among the top three for their risk-adjusted returns, as measured by their Sharpe ratios, over that time.
Yes, those two funds have narrowly underperformed against the now £5.2bn CF Woodford Equity Income fund since its launch in June, but both are top decile over that period and have returned three times more than the average tracker.
As Barnett says, he has had to deal with a considerable amount of portfolio re-shaping over that time.
“The most significant − and most immediate − changes I made to the portfolio were to the individual stock weightings,” Barnett said.
“I have reduced the portfolios’ weightings of the biggest holdings to a maximum of 6 per cent. For example, the holding in AstraZeneca in the High Income Fund which measured 9.7 per cent of assets a year ago, now represents 4.4 per cent. I continue to view the company as an attractive long-term investment, but I also value the benefit of having diversification of risk across the portfolio.”
“The result is that the top 10 holdings now account for 42.7 per cent of the portfolio compared with 58.2 per cent a year ago.”
Source: Invesco Perpetual
Outside of changing the portfolio weightings, he has upped the funds’ exposure to mid-caps which reflects his view that the FTSE 250 is littered with attractive long-term investment opportunities.
He hasn’t given up on large-caps though. He has increased the total number of positions by introducing eight new FTSE 100 stocks – Babcock, BP, Compass Group, Friends Life, Legal & General, Reed Elsevier, Smith & Nephew and London Stock Exchange.
Given that he has successfully introduced these changes to the portfolio whilst battling redemptions – which seem to have now stopped – it seems odd that more hasn’t been said or written about him.
Of course, the Woodford name sells and therefore it is understandable that his every word or action will be covered by the press – especially as his new group has been active in terms of marketing and communicating with all parts of the fund management industry.
Also, the reason why Barnett’s outperformance may have gone under the radar is because, let’s face it, it’s only been a year – and that year has been a market that you would expect him to do well in.
That being said, he would have found himself in the press far more if he was languishing in the bottom, rather than top, decile over the past 12 months or so.
Andrew Alexander, director and head of investments and product strategy at Three Counties, made the decision to stick with Mark Barnett and agrees that the manager maybe hasn’t received the credit he has deserved, but he has been extremely happy with the way in which the Invesco Perpetual manager has run his clients’ money.
“I think the history of the funds, be it the High Income, Income or Strategic Income funds, has always been quite predictable which is always good and satisfying for an investor,” Alexander said.
“When we sat down with Mark Barnett we had complete faith in him and his team and performance has been really satisfying as it has been one of those funds we have held and not had to worry about.”
“With active management coming under more pressure both in terms of performance risk-adjusted returns, the way in which it has performed has been absolutely delightful. We have always received good communication from Invesco Perpetual and so we have had no complaints whatsoever.”