Neil Woodford’s resignation has sparked a flurry of activity in recent months, with many opting for alternatives to the two multi-billion pound UK Equity Income funds, and others putting money aside ready for the launch of CF Woodford Equity Income next month. Alexander has opted to stick with FE Alpha Manager Barnett (pictured), though has taken the decision to sell out of the firm’s flagship High Income fund.
“I had lunch with Mark [Barnett] back in November, and on the back of that I switched my holding from High Income to Strategic Income,” he said.
“He told me he was going to do exactly what he’s done – make the two larger funds more like Strategic Income, by selling down the tail of unquoted companies.”
“The two income funds have their dilution levy, and while all the changes are going on we’d rather be in the Strategic fund rather than the ones that are starting to look more like the Strategic fund.”
“We thought ‘let’s bite the bullet and do it now.’ It’s also allowed us to separate ourselves from all the noise.”
“We don’t have to worry what’s coming out in the media, and there’s the issue of outflows [from Invesco Perpetual Income and High Income] as well. We don’t have to deal with all the detritus, and so far it’s worked to an absolute T.”
Performance of funds, sector and index since Oct 2013
Source: FE Analytics
“The fund has beaten Income and High Income [since Woodford’s resignation], and they have themselves beaten the All Share, which is exactly where you want to be.”
It’s important to note that Woodford remained lead manager of the two funds until March 2014, though there was a handover period following his resignation. Though Invesco Perpetual Income and High Income have been largely unfazed by the near £4bn in the way out outflows over the past six months, many believe a similar portion could depart when Woodford’s new fund is open for business.
Alexander (pictured) acknowledges that the increasing similarities between the three funds may result in a merger at a later date, but says he is relaxed about it at the moment. The one concern he has is Barnett’s ability to invest in mid-caps, which has enabled the Strategic fund to add a great deal of value in recent years. However, he says this is an issue he will consider at the time, noting that Barnett invests predominantly in large caps anyway.
“His style lends itself to a larger pile of assets, as most of what he is investing in is the large, liquid stocks.”
“It’s not been investing in small caps, so I don’t think it’s a major issue,” he said, adding that it’s unlikely to happen for another 12-18 months, when outflows from the larger funds have settled down.
As well as outperforming in the short-term, Invesco Perpetual UK Strategic Income has a better record than Invesco Perpetual Income and High Income over one, three and five year period, and is now only fractionally behind over 10.
Source: FE Analytics
Alexander rates Woodford highly as a manager, but thinks that those automatically following him into his new venture should realise that they are leaving behind a quality manager.
“Barnett been working there for 17 years, and over that time it’s not just been Woodford who’s been making the calls and decisions, I can assure you,” he said.
Director of SG Wealth Management Neil Shillito also says he will not be following the herd, and has decided to stick with his holding in the Invesco Perpetual Income fund.
“A lot of people have benefitted from being invested in Neil Woodford for a number of years, but given the strength of the [UK Equity Income] sector I don’t see the need to be religiously following him into his new venture,” he said.
“I’ve known Mark for a number of years and think he’s a quality manager.”
Shillito doesn’t think losing Invesco’s infrastructure will do too much damage to Woodford’s cause, as he has such excellent access to company management in his own right.
However, he thinks that the cult-like following of any manager is potentially dangerous, and sees his departure as a good opportunity to reassess his UK Equity Income portfolio.
He says he likes Nick Kirrage and Kevin Murphy’s Schroder Income fund, which incorporate a deep value bias, as a good vehicle to sit alongside Invesco Perpetual Income or High Income.
Though Woodford and Barnett would themselves call themselves contrarian managers, Kirrage and Murphy only target the most unloved of companies, and invest across the market cap spectrum.
“When Invesco has had a tough time in the past these guys have done well, and vice versa,” said Shillito. “It’s good to have a bit of a mix.”
Performance of funds over 7yrs
Source: FE Analytics
Invesco High Income historically has a much better record in falling markets, while Schroder Income excels during rising markets. Kirrage and Murphy posted bottom quartile returns in the down year of 2011, while Woodford led his fund to the very top of the sector.
Conversely, in 2009 Schroder Income achieved top quartile returns of 35.87 per cent, while Invesco High Income was well behind with 9.81 per cent.