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Mark Barnett: The three long-term themes powering my portfolio

FE Alpha Manager Barnett explains how ageing demographics, consumer shifts and increasing globalisation will continue to benefit his £1.2bn Perpetual Income and Growth investment trust.

Lauren Mason

By Lauren Mason, Senior reporter, FE Tru...
Friday May 19, 2017

Shifting consumer trends, an ageing population and increasing globalisation are three of the biggest long-term themes that will continue to power the returns of Perpetual Income and Growth investment trust, according to Mark Barnett (pictured).

The star manager, who has headed up the trust since 1999, said these huge structural shifts have altered the outlook for the future generation – not to mention investors – but noted that they present attractive opportunities for those hoping to generate income and capital.

“Shifts in consumer trends overlay the wider, macroeconomic and societal shifts which have played out over the period; in 1996, the UK average house price was £70,000, a litre of fuel cost 60p and the Bank of England interest rate was 5.94 per cent,” he pointed out.

In contrast, Barnett said post-crisis, ultra-loose monetary policy from the Bank of England has led to rocketing house prices, increased life expectancy and a mass overall societal shift.

Yet among all of these changes, the manager said his investment objectives have remained steadfast amid the changing environment around him.

While his positioning has indeed changed, the trust still aims to provide investors with growth and rising income through exposure to companies that offer sustainable and growing dividends.

This process has stood his investors in good stead over the long term as, since the turn of the millennium, the trust has returned 538.4 per cent compared to its sector average and benchmark’s respective returns of 209.77 and 126.29 per cent.

Performance of fund vs sector and benchmark since 2000

 

Source: FE Analytics

Over the same time frame, investors would have received £12,875 in income alone based on an initial £10,000 investment.

In the below article, Barnett discusses the three themes he is utilising in a bid to maintain Perpetual Income and Growth’s strong performance.

 

Consumer shifts

The manager points out that the trust has had a significant weighting in the consumer goods sector for several years, most of which has been held through tobacco stocks.

While some could argue that the tobacco industry is faced with increased societal health awareness and a dwindling popularity in smoking, Barnett said the sector has adapted well to these changes.

“This area of the market has been proactive in its response to both shifting consumer trends and an increasingly hostile regulatory environment,” he reasoned.

“Advertising restrictions, smoking bans and stigma may have meant the end-game for a less resilient sector, but through consolidation, price hikes and the introduction of new technologies, the sector continues to deliver both earnings and dividend growth to shareholders.”

Performance of indices over 5yrs

 

Source: FE Analytics

He added that, while sales volumes across developed markets have indeed fallen, the industry has managed to achieve above-inflation price increases. The manager also said the declining trade within developed markets is counter-balanced by scope for volume growth across the emerging world.


Not only this, Barnett noted that increased awareness of physical health has raised the demand for smoking alternatives, such as e-cigarettes.

“First imported into Europe and the US in 2006, e-cigarettes have emerged through newly-established production and distribution networks and now comprise a wide range of products and devices,” he explained.

“In the US, e-cigarettes are now the most commonly used tobacco product among young adults aged 18-24, surpassing conventional cigarettes in 2014.”

Examples of stocks that Barnett holds within the portfolio include Reynolds American, British American Tobacco and Imperial Brands.

“The recently agreed merger of British American Tobacco (BAT) and Reynolds American is a logical conclusion to the already close relationship between the two groups (via BAT’s long standing 42 per cent stake),” the manager said.

“BAT’s Brazilian chief executive Nicandro Durante has also announced ambitious plans to expand the combined entities’ “next generation” product offering; the business has already launched e-cigarette and vaping products in 12 markets, with plans to double this in both 2017 and 2018.”

 

The demographic shift

The ageing population across developed markets has been well-documented. Many investors worry about a shrinking workforce and the impact this could have on markets.

However, Barnett said it has been a major driver of innovation within the pharmaceutical sector as it has increased the need for new drug discovery.

“Ageing populations consume more prescription medications, supporting volumes across the sector, but consumption trends have also driven an increase among younger cohorts over time,” the manager said.

“AstraZeneca has been at the forefront of drug development over the past 20 years, bringing a series of ‘blockbuster’ – generating annual sales of at least U$1bn – drugs to market.

“Among these has been acid reflux treatment Nexium, approved in March 2000, cholesterol inhibiter Crestor, approved in December 1996 and anti-psychotic Seroquel, which gained regulatory approval in September 1997.”

Barnett said major scientific developments – such as the mapping of the human genome and breakthroughs in cancer treatments – could be the tip of the iceberg for the development of new life-changing medicines. 

He said current holding AstraZeneca is among the companies demonstrating some of the highest levels of innovation within the industry. For instance, Barnett noted that the firm announced a decade-long project last year aimed at identifying numerous genetic diseases.

Another market area the manager holds that is set to benefit from the ageing population is financials. Barnett holds a number of insurance businesses – chiefly life insurance firms – as a way to play the retirement of the ‘baby boom’ generation. One prime example is Legal & General, which currently accounts for 2.8 per cent of the overall portfolio.

“Legal & General has been a major beneficiary of rising demand momentum from the UK’s ageing population and has built a market-leading position in the UK’s retirement market,” he said.

“Drawing on expertise in statistical analysis, demographics and actuarial modelling, L&G has developed a suite of insurance, pension and bulk annuity products to meet rising demand; the business currently serves five million individual insurance customers in the UK and has built an annuity portfolio of £54.4bn.”


Increased globalisation

Barnett said the likes of Airbnb and Uber are prime examples of firms that are popular among ‘millennials’ and have reaped the benefits of an increasingly global economy.

He said EasyJet, which is a current holding in the Perpetual Income & Growth fund, is also a major beneficiary of improving ease of access to different areas of the globe.

“UK residents made 42.5m trips overseas and spent £16.2bn abroad in 1996, dwarfed by the 65.7m overseas visits and £39bn expenditure recorded in 2015,” the manager pointed out.

“EasyJet has focused its strategy on developing leading positions in Europe’s top airports, tapping into the continent’s premier markets by GDP with an attractive customer proposition.

“Launched in 1995 with just two Boeing 737 aircraft on routes from London to Edinburgh and Glasgow, the group added its first international route to Amsterdam the following year. The group’s structure enables significant cost advantage relative to its legacy and charter competitors; aircraft have been reconfigured to enable a higher number of seats per flight, the group has honed a point-to-point network model to drive higher load factors and negotiated a fleet deal to reduce ownership and maintenance costs.”

The stock hasn’t had an easy run recently, however. For instance, its share price plummeted during the immediate aftermath of the EU referendum due to concerns that a single European aviation market would form. Ongoing terrorist attacks through the course of 2016 also dampened returns.

Performance of stock over 3yrs

 

Source: FE Analytics

Despite this, Barnett said EasyJet’s has good scope for organic growth, given that only a small proportion of the people that live within an hour of one of its airports are currently customers.

“Increased travel networks, rising immigration levels and declining communication costs have also driven a rising trend for outsourcing of IT, catering and facilities management, creating increasingly global workforces,” he explained.

“Portfolio holding Compass Group has been well-placed to benefit from this trend, expanding rapidly over the past 20 years; admitted into the blue-chip FTSE 100 index in 1998, the contract food service and support provider now employs over 470,000 people in 50 countries and is the sixth-largest publicly-traded employer in the world today.”

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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