Biotechnology and university spin-out firms are likely to play a greater role in driving returns over the coming years for the Invesco Perpetual Income and Invesco Perpetual High Income funds, according to Invesco Perpetual’s head of UK equities and manager of the two portfolios Mark Barnett (pictured).
The manager, who heads four investment trusts and three open funds, including the £12.4bn Invesco Perpetual High Income, the £6.3bn Invesco Perpetual Income funds, is expecting a more bearish performance from large-caps stocks over the medium term while he thinks unquoted/university spin-out firms could deliver much larger returns.
“I don't want to confine myself just to large companies. Some of the best innovation is going on at the smaller end of the market,” he said.
“It does come with more risk though, because they don't have the same extent of diversification that you have in very large pharmaceuticals - [for example].”
“With markets becoming flatter, it may become a greater proportion of the returns [in my open-ended funds]. However, they are more volatile and less certain because these are not correlated assets – which is part of their attraction,” he added.
Biotechnology stocks have soared in recent years with the NASDAQ OMX Biotechnology index up 231 per cent over five years and specialist funds such as Pictet Biotech, Candriam Equities Biotechnology and AXA Framlington Biotech also making stellar returns. However, they has also seen a substantial set back in the recent bear market, being down at least 20 per cent from their high.
Performance of funds and index over 5yrs
Source: FE Analytics
Barnett, like his predecessor Neil Woodford manager of the £7.9bn CF Woodford Equity Income fund, focuses the majority of his portfolios toward market leading global mega caps such as Imperial Tobacco and AstraZeneca.
However, the two FE Alpha Managers have also been backing very small micro-cap or unquoted companies closely linked to advanced university research in fields such as healthcare and biotechnology for a decade or so.
Woodford in particular has increased his interest in the area since launching the CF Woodford Equity Income fund in June 2014. This is roughly when Barnett took over from him as Invesco Perpetual’s head of UK equities and manager of the two flag ship funds.
“I'd been doing it in a small way before I changed my role. When I changed my role I inherited a large portfolio of unquoted stocks and I have adopted a different strategy,” he said.
“I have been interested in this area for some time because I think that looking at an economy like ours, the true innovation in the pharmaceutical industry is being carried out in university laboratories.”
It must be noted that Barnett has made a number of changes to the portfolios he inherited – such as reducing their concentrations and completely liquidating long-term holdings such as GlaxoSmithKline.
Nevertheless, Barnett still thinks that large cap stocks can offer good returns but that they will be much more subdued for some time due to the current turmoil in markets.
In the last six months there has been a number of follow on investments in existing holdings of unquoted and micro caps stocks across his open-ended funds, Barnett says.
“There is a whole range of firms in the portfolio ranging from those doing the cutting edge in terms of DNA therapy and understanding gene therapies and gene modification to those involved in new ways of approaching drug trials and reducing costs.”
“My new strategy in my open-ended funds has been to focus in on companies where I have invested as a co-investor alongside some of the university commercialisation businesses such as imperial innovations and IP Group - which I hold big stakes in.”
“Those business bring me opportunities to invest in some of their spin-outs which I have taken the opportunities to do recently.”
Since Woodford launched his new fund and Barnett took over Invesco Perpetual Income and Invesco Perpetual High Income, all three funds have been doing very well, outperforming the FTSE All Share by a wide margin although Woodford has managed to stay almost 10 percentage points ahead of Barnett.
Performance of funds and index over 5yrs
Source: FE Analytics
As a recent article pointed out, the unquoted/biotechnology firms have been very important for Woodford with Stratified Medical the biggest single contributor to the strong outperformance in 2015 for his fund.
Prothena, which is listed on the NASDAQ, was the next biggest contributor after having rocketed 165 per cent IN 2015. Barnett says he is opting for some NASDAQ-listed holdings but mostly he interested in the UK-listed or unquoted firms.
While he is optimistic for the prospects of these names, he does caveat that they can be more volatile than more traditional stocks.
“They work to their own beat. They work to their own timetable. There are also lots of obstacles and slips in the road,” he said.
As far as our data goes back, which is more 16 years, it shows Barnett has strongly outperformed his peer group by more than tripling the average return.
Performance of Barnett versus peer group composite
Source: FE Analytics
