While Barnett’s portfolios have many similarities to Woodford’s and the FE Alpha Managers have similar styles, Younes (pictured) points out there has been more divergence in recent years. Sector selection is just one area where this has been the case, he explains, illustrating that the two managers have different views on the current state of the UK economy.
"Since the end of 2012, Woodford has increased his overweight position in healthcare, while Barnett increased his allocation to the financials and consumer services sectors," he said.
"This difference in sector preferences between the two managers explains why their funds’ behaviour began to diverge after the third quarter of 2012, even after taking into consideration the huge volatility in returns coming from financials."
Data from FE Analytics shows that Invesco Perpetual Income, Invesco Perpetual High Income and Invesco Perpetual UK Strategic Income produced very similar returns in the three years to 1 November 2012.
Performance of funds to Nov 2012
Source: FE Analytics
However, over the past year Barnett’s fund has raced away, returning 30.41 per cent since last November while Woodford’s funds have returned 20.91 per cent and 20.26 per cent.
Performance of funds since Nov 2012
Source: FE Analytics
"Their performance was more or less on a par until November 2012, after which Mark Barnett has outperformed Neil Woodford," Younes said.
The analyst adds that the differences only really started to emerge recently, and there is still a high degree of similarity in the holdings.
"Over the last seven years, the correlation between the Strategic Income funds managed by Barnett and the Income and High Income funds managed by Woodford is 0.96," he said. "This suggests that the two investment styles are very similar."
"Looking at the top holdings for their respective funds also confirms this; only the weightings differ, as Woodford prefers running his portfolio with a higher concentration in the top-10 holdings, while Barnett’s approach to portfolio construction is more balanced and he refuses to invest more than 5 per cent in a single holding."
Top 10 stocks in funds
| Invesco Perpetual Income | weighting | Invesco Perpetual UK Strategic Income | weighting |
|---|---|---|---|
| GlaxoSmithKline | 8.8 | BT Group | 5.85 |
| Astrazeneca | 8.51 | Roche | 4.29 |
| BT Group | 6.66 | Novartis | 4.15 |
| Roche | 5.41 | BAT | 4 |
| BAE | 5.15 | Thomas Cook | 3.85 |
| BAT | 4.86 | Astrazeneca | 3.76 |
| Reynolds American | 4.54 | BAE Systems | 3.67 |
| Imperial Tobacco | 4.41 | Imperial Tobacco | 3.67 |
| Reckitt Benckiser | 4.24 | Reynolds American | 3.56 |
| Capita | 3.99 | GlaxoSmithKline | 3.35 |
Source: FE Analytics
Thomas Cook is the most notable stock to appear in Barnett’s top-10 but not in Woodford’s, and it is no surprise it is a mid cap.
That area of the market has been the most successful over the past couple of years, and Barnett’s fund has been prospering from this trend.
"Barnett’s decision to start differentiating himself from his mentor from the end of 2012 has been amplified by the fact that Barnett only manages £290m in the Strategic Income fund," Younes said.
"This means he can access stocks in the medium market capitalisation space that Woodford cannot with his much larger £33bn pool of assets under management."
The other chief difference is in the sector weightings, Younes says, which reflects the managers' differing perspectives on the outlook for the economy.
"Barnett has gone into financials, while Woodford has stayed away, believing there is still much that can go wrong with the sector," he said.
FE Analytics data shows that Barnett has raised his weighting to financials from 14.36 per cent at the start of the year to 19.25 per cent today.
Woodford had 8.41 per cent in the sector in his Income fund in January and has 8.36 per cent today.
This differing view cuts to the heart of the issue with Barnett taking over. While the manager has an excellent track record, Woodford has built his success on some bold calls against the grain that have paid off.
One was to avoid technology stocks in the run-up to the dotcom boom, and another was to avoid financials in the run-up to the 2007 crisis. It remains to be seen whether Barnett will achieve similar tactical success.
"These contrarian calls have been Woodford’s signature during his time at Invesco and account for a significant part of his performance," Younes said.
"While Barnett is clearly from the same stable, he has shown himself to be no clone and we can expect him to have a significantly different outlook to his predecessor."
While there are differences between the pair that need to be taken into consideration, Younes says that the choice of Barnett to take over makes sense, and investors should not be concerned by the switch.
"Due to his long career at Invesco Perpetual within Woodford’s UK equities team, Barnett is an obvious replacement," he said.
"There is much that is similar about their approaches, such as company analysis and the way they pick stocks."
"The biggest difference is in their reading of the economy and the positions they are willing to take to support their convictions."
Barnett will have to handle a larger fund than he is used to when he takes over, which is a challenge in itself.
Investors who like the manager’s current performance profile may be considering switching into the Invesco Perpetual UK Strategic Income fund itself, which is also cheaper than Woodford’s funds, with ongoing charges of just 1.2 per cent to the larger funds' 1.69 per cent.
