Their funds are the most searched for by our readers as well as broadly popular in the UK thanks to their stellar track records and familiarity to everyday investors.
The £5bn CF Woodford Equity Income fund was launched in June 2014 after Woodford set up his own firm after more than 25 years at Invesco Perpetual. Woodford previously ran the £6.8bn Invesco Perpetual Income and £12bn Invesco Perpetual High Income funds. Barnett took over Woodford’s two titan funds when the latter departed.
The two FE Alpha Managers have similar styles, understandable considering their career paths as fund managers, but they have shown some divergence since the split, according to Thomas McMahon, fund analyst at FE Research.
“Since taking over Barnett has taken advantage of outflows to reduce the concentration in the largest stocks, which reduces single stock risk and has made the portfolio less dependent on the healthcare sector,” he said.
“He has also hired an analyst, Freddie Bouverat, to help him with the unquoted companies. The fund will continue to invest in early-stage stocks but is focusing on the umbrella companies which spin out ideas from university research.”
“The overall approach is still the same: Barnett is looking for total return and favours growing dividends over headline yield. We rate the manager highly and continue to recommend the fund to clients as well as invest in it.”
Invesco Perpetual Income and Invesco Perpetual High Income have the same holdings in their top 10, albeit in slightly different amounts, while Woodford only has two different plays in his top 10.
However, the different weightings to these similar stocks as well as the smaller stock bets are apparent when looking at the funds’ respective sector weightings.
Woodford has 10 percentage points more in healthcare than Barnett, who has recently trimmed around that much exposure to the sector from his portfolio. Healthcare is Woodford’s largest sector overweight at 35 per cent of the portfolio and the manager is vocal in his enthusiasm for its outlook.
That both managers have many fans amongst retail investors is obvious from their colossal size, but the pair are also popular in the professional investment world.
FE Alpha Manager John Chatfeild-Roberts, who heads up the Jupiter Merlin range, has backed both managers in his funds of funds believing there is enough reason to hold both, to the extent where 20 per cent of the £4.5bn Jupiter Merlin Income fund is managed collectively by the pair.
However, Chatfeild-Roberts opts for Barnett’s ‘other’ fund: the £1bn Invesco Perpetual UK Strategic Income, which he has run since 2006.
FE Alpha Manager Algy Smith-Maxwell, who co-manages Jupiter Merlin Income, says despite Barnett and Woodford have working together for many years, they manage money in very different ways.
"Woodford is willing to take more concentrated positions than Barnett, with his top ten holdings making up a bigger percentage of his overall holdings," he said.
"Their investment approach also differs in that Woodford is more inclined, in our view, to take high-conviction sector bets notably in the healthcare sector where he has much greater exposure than Barnett. Another distinguishing characteristic of Woodford’s fund lies in its long tail of smaller holdings, which currently makes up around 20 per cent of his portfolio, up from around 10 per cent when he was a manager at Invesco.”
In terms of performance, Woodford has beaten Barnett since launching his new business in June 2014 with a 15.67 per cent gain compared with 11.01 per cent for Invesco Perpetual Income, 10.48 per cent for High Income and UK Strategic Income returned 9.48 per cent. By comparison the FTSE All Share gained 2.48 per cent.
Performance of funds, sector and index since June 2014
Source: FE Analytics
Thesis’ Steven Richards does not hold Woodford’s fund despite its solid run, opting instead for Barnett.
“We have always invested with Mark Barnett rather than Neil Woodford and did so consciously,” he explained.
“When they were both working together and we were looking at the Invesco Perpetual stable of UK funds, we decided we liked their style and investment philosophy but actively identified Mark Barnett’s UK Strategic Income fund to invest with rather than Neil’s funds.”
“The reason we did this was because we preferred the sector and stock limits that Mark had within UK Strategic Income versus the completely unconstrained - other than UCITS limits - nature of Neil’s funds.”
“We simply just preferred this because we got many of the same stocks with Mark as Neil, but from a risk perspective we felt more comfortable. A further by-product of this was that with slightly lesser positions in the same stocks and sectors than Neil’s fund, Mark’s UK Strategic Income fund therefore had extra cash which permitted him to invest more in his own ideas which tended to be away from the mega caps and more in the mid cap areas of the market.”
Richards also likes Barnett’s use of 20 per cent of the fund to invest in ‘special situation’ or turnaround’ stories.
“This was off-piste to the central defensive cash flow dividend paying thesis of a typical Invesco Perpetual stock. Added to all of this, the then smaller size of Mark Barnett’s UK Strategic Income fund permitted him more flexibility to do all this, plus we were familiar with his track record managing the Perpetual Income and Growth trust.”
However, Richards says with Barnett now heading up the two flagship funds, he has ongoing scrutiny over how the manager divides his effort between the three funds.
“The only concern we had was whether his newfound responsibilities will take him away from the stewardship he had always shown UK Strategic Income. We decided we would remain invested though and keep a close eye on developments and to this date continue to be more than happy with the performance delivered.”
Paul Warner, managing director of Minerva Fund Managers, holds Barnett but is considering switching over to Woodford as he thinks the manager’s more even spread of stocks and lower concentration may be helpful to dampen volatility.
“It is not how I work in other sectors but I have found it to be the best system in UK equity income but it would have to be worth it because of the capital gains tax implications of switching out,” he said.
Woodford is the cheapest of the four funds with an OCF of 0.67 per cent. Invesco Perpetual Income and High Income charge 0.91 per cent and 0.92 per cent respectively.