FE Alpha Manager Neil Woodford announced in March he was leaving the £13.4bn Invesco Perpetual High Income and £8.4bn Income funds to set up a new venture, handing over the reins to FE Alpha Manager Mark Barnett who has built up a strong record during eight years as manager of the five crown rated Invesco Perpetual UK Strategic Income fund.
Lanning says while he rates FE Alpha Mark Barnett highly he is not tempted to invest at the current time thanks to the difficulties he will face during the transition period.
“When you invested with Neil Woodford you knew what you were getting, Mark Barnett is a very good fund manager in his own right but he has a different style and a different approach to Neil,” Lanning said.
“If we had been a holder of the fund [before the Woodford exit] the biggest concern we would of had if we held it would be how much money is going to be taken away and whether Mark would be able to manage those outflows.”
“From what I can see he has done well but I think if you own the fund now it is a different product to the one you bought originally.”
“Investors don't necessarily need to be concerned but I think they just need to recognise they have a different vehicle.”
“They [investors] don’t need to be worried about being the last person on the dance floor either, as the fund is sufficiently large but it is definitely harder to run a fund where money is coming out than money is coming in.”
Whilst Lanning says he doesn’t plan to hold Invesco Perpetual Income he hasn’t taken any steps to invest in Woodford’s new venture Oakley Capital either.
Although, he says Woodford’s habit of looking for smaller companies is an appealing investment style.
“There was a bit of a venture capitalist side to Neil [Woodford], he liked identifying very small companies and backing them with a long-term time horizon. That is a very attractive way to run money, but I don’t think Mark Barnett adopts the same approach.”
“When Neil's resignation was announced a lot of the small cap companies that were in the portfolio were sold down very quickly.”
He also wonders if Barnett will be afforded the same amount of leeway by investors to take contrarian positions.
“If you go back to the tech boom where Neil refused to buy into technology, it was really painful for quite a long period of time.”
“There are not many managers who would have been given the luxury of that level of underperformance for that length of time but because it was Neil Woodford, he was.”
Lanning says that he currently prefers Liontrust Macro Equity Income for UK equity income exposure, while for growth he is turning to Blackrock UK Focus and Aberforth UK Smaller Companies.
Liontrust Macro Equity Income
The £382m Liontrust Macro Equity Income fund is run by FE Alpha Managers Jan Luthman and Stephen Bailey and identifies macro trends affecting the UK market that will act as either a tailwind or headwind to the performance of certain industries and sectors.
The fund has returned 36.48 per cent over three years, narrowly missing its IMA UK Equity Income sector average of 37.32 per cent, but beating its benchmark – the FTSE All Share – which rose 27.89 per cent.
Performance of fund versus sector and benchmark over 3yrs
Source: FE Analytics
Luthman and Bailey have demonstrated an impressive ability to identify profitable themes since managing the fund, building themselves an enviable track record, Lanning says.
“This is combined with detailed fundamental analysis; the result is a fairly concentrated portfolio that looks materially different from the broader index at both a stock and sector level,”
he said. Lanning gives the example of the fund’s current overweight positions which include pharmaceuticals and London property, whilst carrying no utilities or tobacco stocks in the portfolio.
Blackrock UK Focus
Lanning says the £243m Blackrock UK Focus, co-managed by Imran Sattar and Luke Chappell, is relatively unknown in the UK retail market; however it forms a core holding across the Fusion range.
The fund has returned 37.89 per cent over three years, falling short of its IMA UK All Companies sector average of 42.42 per cent, but beating its benchmark – the FTSE All Share – which rose 27.89 per cent.
Performance of fund versus sector and benchmark over 3yrs
Source: FE Analytics
“The key attraction, outside of Chappell being a proven stock picker, is the concentrated large cap portfolio,” he said.
“Whilst we continue to retain exposure to small and mid caps, valuations are becoming increasingly stretched in certain areas.”
“Where we do see more value is higher up the market cap scale, an area where the bulk of the portfolio is currently invested.”
Aberforth UK Smaller Companies
Lanning is using the Aberforth UK Smaller Companies fund for a conviction play on the UK domestic recovery, he says.
The fund has returned 66.22 per cent over three years, beating its IMA UK Smaller Companies sector average of 51.59 per cent and benchmark – the Numis Smaller Companies ex ITs– which rose 58 per cent.
Performance of fund versus sector and benchmark over 3yrs
Source: FE Analytics
Lanning says despite a period of outperformance the portfolio remain cheap relative to its index as he expects the companies should to be beneficiaries of an increasing amount of M&A activity.
“Many of the ingredients for this were in place last year, companies have record levels of cash on their balance sheet and the lure of growth through industry consolidation remains compelling,” he said.
“However activity remained low which can only be explained by continued low levels of confidence. We are more optimistic and feel confident that the UK domestic economy remains strong whilst we expect global growth to remain subdued but importantly improving.”
“We would expect this environment to lead in time to increased M&A activity that should benefit smaller companies.”
“Most importantly we believe that after a period of strong performance from risk assets as a result of margin expansion, earnings growth will become the key driver of returns in 2014. As a result high conviction stock pickers like Aberforth should continue to outperform.”