All eyes were on Mark Barnett when he took over Invesco Perpetual Income, Invesco Perpetual High Income and the Edinburgh Investment Trust from star manager Neil Woodford (pictured) in March last year. 
Many investors sold out and bought into Woodford’s own fund when it launched last June, but FE Alpha Manager Barnett, who has run the five crown-rated Invesco Perpetual UK Strategic Income fund since 2006, has managed to deliver a stellar performance since he took over.
Over his tenure, Invesco Perpetual Income has outperformed its peer average in the IA UK All Companies sector by 12.33 percentage points to return 13.91 per cent while Invesco Perpetual High Income has outperformed the sector by 13.06 percentage points, returning 14.64 per cent.
Performance of funds vs sector over management tenure
Source: FE Analytics
Both Woodford and Barnett’s funds are immensely popular, with Woodford’s Equity Income fund seeing the biggest inflows within the entire Investment Association universe over the last year.
What is less orthodox though is holding both of these managers’ funds together in the same portfolio, given that they manage money in a very similar and have very high degree of overlap within their portfolios.
However, this is something that FE Alpha Manager Guy Bowles is doing in his four crown-rated Ingenious Global Growth fund.
Currently, the Woodford Equity Income fund is the portfolio’s second-largest holding and has a 6.6 per cent weighting, while Invesco Perpetual High Income is the fund’s joint third-largest holding at 6.5 per cent.
“Normally our default position is to sell the fund when a manager leaves and then think about what to do, which is what we’ve done in the past,” the manager said.
“Unusually though we met Mark Barnett, looked at his track record and what he was doing with the fund, the way his fund was structured and we got extremely comfortable continuing to back him. So, we decided not to sell the fund.”
The investment team then didn’t buy Woodford’s fund for another three or four months after it was launched, as they wanted to be sure the infrastructure of his business was robust.
Bowles says this has proved prudent in the past, for instance when he decided not to invest Anthony Bolton after he’d left Fidelity Special Situations to set up his China trust, which was a decision that took him by surprise.
“We just felt he was translating what he was doing in the UK previously into something that wasn’t necessarily going to work elsewhere and we decided not to follow him, so it wasn’t by any means a given that we would follow [Woodford],” he said.
“He raised billions and seemed to have lots of revenue and good beta, so we thought, ‘what the heck are we waiting for? Let’s put some money in’.”
Bowles and his team have since kept in close contact with Barnett and Woodford and can see significant differences in the way they’ve built their portfolios, which is shown in the funds’ varying performances.
Performance of funds vs sectors over 1yr
Source: FE Analytics
The funds are also in different sectors, following the relegation of Barnett’s funds to the IA UK All Companies sector for failing to meet the Investment Association’s three-year yield requirement.
“It was pretty clear for us when we met with Mark Barnett that he was going to subtly change the way the fund had been run and would make it more of his own fund, in particular selling down and get rid of a lot of private equity and micro-cap holdings. Not that he thought it was terrible, he just wasn’t on top of it so sold it back to Neil,” Bowles continued.
“Neil obviously had a number of ideas that he wanted to put in his portfolio. We’ve had the two managers in recently and they’ve both got quite different views on two or three stocks.”
“From our point of view, we anticipated they would diverge in the way they managed and the way they performed and that has absolutely proven to be the case. That’s why we hold them both, we believe they genuinely are different vehicles.”
There are indeed fundamental differences in both of the funds, even on a simplistic metric basis. For instance, CF Woodford Equity Income is £7.6bn in size and holds 103 stocks, the top 10 of which consist of almost 50 per cent of the portfolio.
Invesco Perpetual High Income is £12.5bn in size and holds 21 more stocks. The fund’s top 10 holdings also account for 38.6 per cent of the portfolio.
However, while AXA Wealth’s Adrian Lowcock agrees that Woodford and Barnett have different investing styles, he says that they still invest in similar markets so it is important to ensure the fund as a whole is well-diversified.
“I would be most concerned about the concentration in the large cap UK equity income space,” he said.
“However, the weightings [in Bowles’ fund] are split fairly equally between the two managers so for me this is more about hedging your bets on which manager will do well. Both have great track records so by splitting your fund exposure across two funds instead of just holding one you are reducing the risk you are exposed to.”
In contrast, Hargreaves Lansdown’s Laith Khalaf says that holding both funds is a perfectly reasonable thing to do but adds that it might be prudent to double the allocation to Woodford at the expense of Barnett’s fund.
“Barnett has got a good track record, Woodford has got a good track record and a longer track record, and he’s managing less money. Would you actually be better off just holding more of Woodford?” he said.
“Both are quality managers with a similar approach and, given Woodford probably just edges it in terms of his track record, I’d say that raises the question of whether you’d be better off putting more money with him.”
Darius McDermott, managing director of Chelsea Financial Services, says that it is important to assess both managers individually as opposed to seeing them as off-shoots of the same investment vehicle. Nevertheless, he agrees with Khalaf that it might be better holding a larger amount in just one of the funds.
“Mark Barnett has done a really good job since taking over from Neil. Neil has given even stronger total returns since the launch of his own fund. I suppose though, if you’re holding more than 6 per cent each, you have to question how much overlap you’re getting on a stock basis,” he pointed out.
“I think we’d be more likely to back one or the other rather than doing both. We’ve got Woodford’s fund in most of our relevant portfolios, whether it’s our cautious portfolio, our income portfolio or our UK portfolio.”
Ingenious Global Growth has outperformed its peer average in the IA Flexible Investment sector by 5.07 per cent since its launch in 2011.
Performance of fund vs sector since launch
Source: FE Analytics
The £46m fund has a clean ongoing charges figure of 1.06 percent.
