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Evenlode Income vs Invesco Perpetual High Income: Which fund are the experts backing?

02 February 2017

In our latest ‘fund battle’, we take a look at two UK income and growth funds that have stellar long-term track records but have struggled over recent months.

By Lauren Mason,

Senior reporter, FE Trustnet

Last year’s swift rotation from growth to value has been well-documented, with many funds holding cyclical or financial stocks rebounding in Q3 and Q4 after a long period of poor performance.

While this has spelled good news for many managers, there are indeed funds that have been left behind after boasting stellar long-term track records. Two prime examples are FE Alpha Manager Mark Barnett’s Invesco Perpetual High Income and Hugh Yarrow’s Evenlode Income.

Readers will be familiar with the funds’ track records, both of which have significantly outperformed the FTSE All Share over three and five years while offering investors growing levels of income.

Over the last six months, however, they have both fallen into the bottom decile, with Evenlode Income returning 1.71 per cent and Invesco Perpetual High Income returning 1.56 per cent while the FTSE All Share is up 7.29 per cent.

Performance of funds vs index over 6months

 

Source: FE Analytics

While it is of course prudent to view returns over longer time horizons, investors may be looking to buy into these funds while their performance has dipped.

Both Evenlode Income and Invesco Perpetual Higher Income have similar aims; to achieve capital growth and increasing levels of income over the longer term. They both have similar yields – 3.4 and 3.26 per cent respectively – and would have earned investors approximately one-quarter of the amount of money they originally invested in income alone over the last five years.

While their top-quartile total returns over three years won them favour among many investors, both funds were also removed from the IA UK Equity Income sector last year for failing to meet the Investment Association’s yield requirements.

Given the funds’ various similarities (both have also been awarded five FE crowns), we asked three industry professionals which of the two funds they would choose to buy given their recent dips in performance.

Martin Bamford, managing director at Informed Choice, says neither funds appear in client portfolios currently but, of the two funds, his preference would be Evenlode Income.

“The fund is a tenth of the size of Invesco Perpetual High Income and doesn’t face the same capacity constraints posed by an £11bn portfolio,” he explained. “Evenlode Income also has a longer tenured management team and a more concentrated portfolio of stocks.


“Invesco Perpetual High Income is a very different beast to the £1bn Evenlode Income fund with around 40 holdings. Despite its concentrated portfolio, Evenlode Income has a much lower allocation to financial services stocks than Invesco Perpetual High Income.”

Ben Willis, head of research at Whitechurch Securities, says the firm invested in Invesco Perpetual High Income some time ago but sold out when Woodford announced his departure. The team currently invests in Evenlode Income.

He says one of the main differences between the two funds is that Yarrow’s investment process on the Evenlode fund is more stock-specific than Barnett’s top-down, macro approach.

“The Evenlode fund has had a bit of a sweet spot over the last few years as the investment process, which focuses on cash compounders and asset light businesses, saw the fund positioned in consumer goods stocks, which have been in high demand until recently,” the head of research explained.

“The Invesco fund develops a macro-driven framework first, followed by bottom-up stock selection, which will see Mark Barnett avoid sectors which he feels are either being challenged or do not offer opportunity (i.e. oil and gas and banks in the past).

“The main similarity between the funds is their approach to dividend investing. Both funds will not chase yields in order to retain position in the IA UK Equity Income sector and so compromise their investment principles.

“Both managers are keen to seek out stocks that can evidence dividend growth potential and so are prepared to invest in lower yielding stocks initially but which can grow dividends on a multi-year basis.”

In terms of their recent blip in returns, Willis says the Invesco fund is often held over the very long term so current investors – who have made strong long-term gains – should remain unfazed.

However, he says it could be more of an issue for Evenlode Income because it has benefitted specifically from the rise in demand for consumer goods.

Performance of funds over 5yrs

 

Source: FE Analytics

“With the reflationary environment sparking the rotation into value stocks, this has been detrimental for the current portfolio. However, Yarrow does have scope to change the portfolio and has moved out of some of the consumer good stalwarts due to high valuations. In addition, the rotation into value may not be sustained,” he added.


Darius McDermott, managing director at Chelsea financial services, says the firm has been a very long-term holder of Invesco Perpetual High Income and also started investing in Evenlode Income shortly after its launch.

While he likes both funds, he would favour Evenlode Income today. However, this is because the firm already has a lot of money in Invesco Perpetual High Income.

“I think there is a lot of similarity in the style they have,” McDermott said. “I would broadly describe the Evenlode offering as investing in more quality companies, but whether these funds are in the income sector or not, these are both managers who are looking for cash-flow.

“Evenlode is very keen to avoid stocks that are capital intensive; they’re looking for capital-light, cash generative businesses with good dividends and the ability to grow those dividends.

“The Invesco fund is obviously very big and has a tail of biotech and private equity stocks. We have nothing against this and Mark has done that for a long time, as has Neil [Woodford], but since Neil has left and now set up his own franchise, there’s another competitor for real, top-quality core UK equity income.

“Broadly, we would deem them both to be income funds and would compare them within that universe; whether they are in or out of the sector is neither here nor there. These are core, high-quality UK income funds with experienced managers and good long-term track records.”

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