FE Alpha Manager Mark Barnett faced a very unenviable task when he took over from Neil Woodford as head of UK equities at Invesco Perpetual in early 2014. 
When Woodford announced he was leaving the group in October 2013 after more than 25 years’ service to set up his own firm, there were genuine concerns that money would flow out en masse of the multi-billion Invesco Perpetual High Income and Income funds which Barnett was set to take charge of.
Unfortunately for Barnett, he was hit by redemptions as investors either wished to follow his predecessor to the newly launched CF Woodford Equity Income fund or look for other alternatives in the highly-popular UK equity income space.
While the outflows were by no means as cataclysmic as some first thought, Invesco Perpetual High Income is 12 per cent smaller than it was when Woodford announced his departure and Invesco Perpetual Income has shrunk by some 40 per cent in size.
That being said, Invesco Perpetual Income and High Income still weigh in at £6.4bn and £12.4bn, respectively, suggesting Barnett (pictured) has plenty of backers.
However, as a recent FE Trustnet article highlighted, the large majority of those seem to be retail, rather than professional, investors.
In each of the last four years, we have trawled through FE Analytics to see which are the most commonly held UK equity income funds with fund of funds managers. Over that time the popularity of Woodford (and now Barnett’s) flagship equity income funds has waned as the number of multi-managers who own them in their top 10 holdings has dropped dramatically.
Popularity of funds as measured by number of FOFs’ top 10s
Source: FE Analytics
It is understandable why the number of top 10s the funds featured in dropped between January 2014 and January 2015 given Woodford’s imminent departure and his then soon-to-be launched portfolio.
However, it seems odd that so many have stayed away from Barnett’s funds, especially given the returns (both absolute and relative) he has turned in since he assumed responsibility.
We have written in the past how Barnett hasn’t necessarily received the plaudits he should have since he became manager of Invesco Perpetual Income and High Income, given he had to deal with substantial outflows but still managed to outperform whilst putting his own stamp on the portfolios (such as by reducing their concentrations and exiting longstanding positions like GlaxoSmithKline).
According to FE Analytics, both five crown-rated funds have delivered double-digit returns since Barnett became manager in March 2014 compared to a 2.64 per cent gain from the IA UK Equity Income sector and losses from the IA UK All Companies sector and the FTSE All Share.
Performance of funds versus sectors and index under Barnett
Source: FE Analytics
That means both rank among the top 25 top performing portfolios out of a possible 344 IA UK Equity Income and IA UK All Companies funds (16th in the case of High Income, 23rd in the case of Income) under Barnett.
It must be noted that the funds are some 10 percentage points behind CF Woodford Equity Income since its launch in June 2014, though both of them are comfortably ahead of their average peers and the wider UK equity market over that time.
Therefore and as one reader pointed out, given Barnett’s stellar long-term track record (he has beaten his peer group composite in 13 of the last 15 calendar years and has more than tripled his peers’ returns since 2000) and he has proven so far he can run a larger pool of money, why do most professional investors continue to ignore his flagship funds?
Performance of Barnett versus peers since 2000
Source: FE Analytics
Ryan Hughes, who co-manages various fund of funds at Apollo, says his decision to not own Mark Barnett’s funds has very little to do with the manager himself.
“From my perspective, I have been very underweight the UK for the last year and have only recently added one long UK equity fund: the Montanaro UK Income fund as I like the long-term prospects of small-cap income from a specialist manager in the space,” Hughes said.
“I've had the view that FTSE 100 stocks were likely to struggle and actually been short the FTSE 100 and therefore this has resulted in my looking away from managers like Mark into other areas, which has ultimately proved to be the correct call. Should my view on this alter than Mark is very much a manager that deserves attention.”
Ben Conway, co-manager on the PFS Hawksmoor Distribution and Vanbrugh funds, has a similar argument to Hughes.
“We do own some of Mark Barnett across the firm (though in our private client portfolios) and we had owned his Invesco Perpetual UK Strategic Income when Woodford was at the firm as we had identified him as a talented investor,” Conway said.
“The fact we don’t own his funds is nothing to do with disaffection towards Barnett, though. It is more we prefer to be much more targeted in regard to our UK exposure.”
Of course, those are just two managers explaining why they don’t hold Invesco Perpetual High Income and Income – but why do so many multi-managers continue to ignore the portfolios?
“I think the answer to this is that managers have been actively seeking to find an alternative to Mark since Neil left for a couple of reasons,” Hughes continued.
“Either fund of funds managers have followed Neil and invested in his new fund and therefore didn’t want to double up on investment style or they anticipated major withdrawals from Invesco Perpetual following Neil's departure and judged that it would be prudent to steer clear of the fund while Mark had to reshape it.”
“In fairness to Mark, he has managed the loss of circa £6bn from the strategy very well but it was clear that this was going to happen and therefore active asset allocators have rightly taken the view that they didn’t want to be exposed to the strategy while this was happening. Looking at fund flows now, the outflows from Mark's fund have stabilised and therefore this should start putting the fund back on the radar of investors again who want that type of style.”
Conway agrees that many multi-managers may have wished to wait on the sidelines to see how Barnett would cope which such large mandates. On top of that, given Woodford is such a “phenomenon” in the fund management world, Conway says it is little surprise his fund has taken the lion’s share of attention.
However, another potential reason, according to Conway, is the huge pool of talent that has emerged within the UK equity space over recent years.
For example, Conway points out that there are a number of young talented managers in both the IA UK Equity Income and IA UK All Companies sectors who have now built up relatively long-track records – such as Thomas Moore, Chris Reid, Ed Legget and George Godber.
Performance of managers versus index
Source: FE Analytics
Therefore, while many focused on a just a select number of managers a few years ago, multi-managers now have a far wider selection of funds to choose from if they want UK exposure.
