Investors in the Invesco Perpetual High Income fund could expect an uplift to performance in the coming months thanks to a likely sell-off in sterling, according to Mark Barnett, head of UK equities at Invesco Perpetual and manager of the highly popular fund. 
The manager, who heads four investment trusts and three open-ended funds including the £11.6bn Invesco Perpetual High Income and the £5.9bn Invesco Perpetual Income funds, says there could be a big boost to many UK blue chip firms’ sterling revenues from overseas as the markets approach the EU referendum polling day on 23 June.
“Sterling is likely to take the majority of the pressure,” Barnett said.
“The UK stock market is a heavily overseas market – over two-thirds of the FTSE All-Share constituents’ revenue comes from outside the UK – and hence, near-term volatility apart, the impact there should largely be limited to the impact of weak sterling.”
According to FE Analytics, sterling is currently down relative to many major currencies including the US dollar, the euro, the Japanese yen and the Chinese renminbi since the beginning of the year.
Performance of currencies versus sterling in 2016
Source: FE Analytics
Simon Smith, chief economist at FX Pro, says while the sell-off in sterling in recent months has started to abate it is likely to slip further as the referendum approaches.
“The potential for further losses in the run-up to the EU referendum remains strong,” he said.
There are just eight weeks until voters head to polls and vote as to whether the UK will remain in the European Union or leave 28 member bloc. The most recent polls suggest the vote is split with 40 per cent in the ‘Remain’ camp, 39 per cent in ‘Leave’ and the rest either unsure or not voting.
Meanwhile bookmakers’ odds are tending to show that Brexit scenario is less anticipated.
Barnett said: “Lessons from other referendums, including in Scotland, Scandinavia and Switzerland, indicate that voters tend to vote for the status quo.”
“I am concerned with the impact the EU referendum will have on markets, simply because markets do not like the uncertainty surrounding a vote. Polls showing a close vote will create a large amount of uncertainty. I also worry about the impact the vote will have on levels of investment. During the run-up to the Scottish referendum we saw a material slowdown in the level of investment and job creation. There is also the uncertainty of further political ramifications in the aftermath of the vote.”
However, he thinks even in the event of Brexit, markets will recover fairly quickly.
“The UK economy is robust enough, with a highly skilled workforce, to withstand the impact of a vote in favour of Brexit, notwithstanding some near-term disruption to investment.”
While he says sterling is likely to take the majority of the pressure from the increasing uncertainty as the vote approaches as well as the even greater uncertainty that a vote to leave would bring, this could be a boon to many of the stocks.
Barnett, like his predecessor Neil Woodford, manager of the £8.77bn CF Woodford Equity Income fund, tends to mostly favour defensive mega-caps such as Imperial Brands (formerly Imperial Tobacco), AstraZeneca, Reynolds American and Roche.
He says as the firms have huge overseas revenues, a sell-off in sterling will boost their returns in other currencies which will result in greater demand for the companies’ shares.
“I believe that the resultant weakness of sterling should have a positive impact on the profits of the companies in the portfolios I manage which have overseas earnings,” he argued.
“The portfolios’ holdings in the tobacco, oil and pharmaceutical sectors are all likely beneficiaries in my view. For example, British American Tobacco recently noted that sterling weakness was beneficial to the translation of its overseas earnings.”
However, he says smaller positions in more domestically focused names could be hit.
“Companies exposed to the central London office market, including Derwent London, have already seen share price weakness. I believe that businesses such as EasyJet would not be best served by the UK leaving the EU – but they will be evaluating and developing strategies to take this into account.”
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
Since taking charge of Invesco Perpetual High Income he has returned 34.3 per cent against an IA UK All Companies sector average of 19.78 per cent and a gain in the FTSE All Share of 14.29 per cent.
Performance of fund under Barnett, sector and index
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.92 per cent and yields 3.22 per cent.
