The FE Alpha Manager, who took over the funds in March 2014, has had to contend with outflows of just over £1.3bn in the past three months alone, according to FE data. Since Woodford announced he was planning to leave the firm in October last year, the funds have suffered redemptions of closer to £5bn, though the outgoing manager ran the funds for much of the time. Invesco Perpetual Income and High Income have performed very strongly in spite of the wall of money flowing out, achieving top-quartile returns since Barnett took over the fund, as well as year-to-date.
Barnett (pictured) says that industry commentators have exaggerated the pace of outflows in recent months, adding that in some ways the money has made it easier for him to diversify the portfolio and increase his weighting to his favourite stocks.
“In a fund of this age [25 years], the client profile means money comes out at a natural rate with people dying and getting divorced,” he said.
“The funds have been running redemptions at an industry average, though in the recent past the rate of buying has slowed, resulting in a higher net redemptions. Aside from the few weeks in the middle of October [following Woodford’s resignation], they’ve been at a natural rate, and have been pretty manageable.”
Performance of fund and sector since Barnett took over fund
Source: FE Analytics
“I have been using the redemptions to sell down some of the large positions. I haven’t tended to use programme trades as I want to be more focused on taking bits and pieces out.”
“What is useful is that the redemptions can be used to reshape the portfolio. I have used them to re-emphasise the ones I rated higher and de-emphasised the ones I wanted to reduce.”
Barnett says he has used the redemptions to bring down exposure to the largest holdings in the fund – namely GlaxoSmithKline and AstraZeneca. These had close to a 10 per cent weighting apiece when Woodford ran Invesco Perpetual Income, but they now have a weighting of closer to 7 and 8 per cent, respectively.
Some of the money coming out of the larger stocks has been used to buy new stocks as well, including Legal & General and engineering support services company Babcock.
“It’s a work in progress, but the funds have certainly not been affected [by the redemptions] in the way some might have anticipated. The fund has done very well year-to-date,” he said.
Barnett says he is looking to make Invesco Income and High Income more like his five crown-rated Invesco Perpetual UK Strategic Income fund, which has outperformed both over one, three and five years.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Invesco Perpetual UK Strategic Income is less reliant on a handful of stocks compared with its two counterparts and has a higher mid cap weighting.
The manager says he is pleased with the progress he has made in reshaping the portfolio, but isn’t totally satisfied yet.
“My message on reshaping is that it is going fine and I am happy to have my name on top of the portfolios as they look today,” he explained.
“It’s not 100 per cent [the same as Strategic] because it’s not possible to do that with portfolios of this size. I made it very clear when I took these funds over that this wasn’t going to be a revolution, but gradual, and that’s exactly what has happened.”
Invesco Perpetual Income’s top-10 currently accounts for half of its assets, while Strategic is significantly less concentrated, at 33.2 per cent.
Three Counties’ Andrew Alexander told FE Trustnet in a recent interview that he sold Invesco Perpetual High Income in favour of Strategic because he wanted exposure to the fund that most accurately reflects Barnett’s best ideas.
Barnett confirms that he has brought down his weighting to Woodford’s favourite unquoted companies in Income and High Income, but will retain exposure to his favourite names.
“I have spent a lot of time working on the unquoted names, and employed [former Numis analyst] Fred Bouverat to cover this area, who has hit the ground running,” the manager said.
“I have committed not to add to a number of them for the time being, partly because I have been getting myself comfortable with what I own.”
“I do believe that owning unquoted companies in a long-term fund is absolutely the right thing to do,” he added.
Unquoted companies currently account for 4 per cent of High Income and just under 6 per cent of Income.
There is speculation that the Strategic fund could be merged into the two larger vehicles in the future, but Invesco says there are no plans for this at the moment.
Barnett says that the transition he has made since becoming head of UK equities at Invesco has been a smooth one, insisting that most of his time is still spent running money for clients.
“The honest answer is that since taking on this new responsibility, I’ve been most focused on running money,” he said.
“The vast bulk of my time is spent on investing – meeting companies that I already know and others that I don’t know so well.”
“There has been more marketing, but that is diminishing to some extent.”
The manager says he spends around 80 per cent of his time running money.
“This is what I’m paid to do, and this is what I enjoy,” he added.
As well as Woodford (pictured), Invesco Perpetual has been hit with other high-profile exits recently, with most joining the star manager at his new firm. Stephen Lamacraft, Paul Lamacraft and Saku Saha are among those that have left Barnett’s team in recent months.
Barnett says he has plans to recruit two or three new individuals, though points out that the core of his team remains intact. “The team is very important – we’ve never had a manager operating solo at Henley,” he said.
“Since October we have had some departures, but the core has remained very similar. I’ve worked for 18 years with [manager of Invesco Perpetual UK Growth] Martin Walker and 10 years with [manager of Invesco Perpetual Income & Growth] Ciaran Mallon.”
“In our support staff, the core has also remained the same, which is important, as for many years they have been doing deals for these very large funds.”
On the issue of Invesco Perpetual High Income being moved into the IMA UK Equity Income sector, Barnett says he is unconcerned, emphasising that he will not sacrifice total return just to hit a yield target.
“[I’m not concerned] and I believe nor are the clients I’ve spoken to,” he said.
“The portfolios are not managed solely on income, and never have been. It’s about generating total return. Income is obviously an important component of that, but it is capital and income.”
“The key to total return is the ability to identify sustainable dividend growth, which will deliver you both your income and your capital. It’s on that basis that I run portfolios.”
“If I am [out of the UK Equity Income sector] I will live with that, but it could be that I end up back in the sector again as has happened before,” Barnett finished.
FE Trustnet will report Barnett’s outlook for the UK market, including his views on the recent correction in mid caps, in an article next week.
