The de-rating of domestically focused companies is providing abundant opportunities in the UK market, according to Invesco Perpetual’s Mark Barnett, who remains optimistic despite a challenging period for his flagship funds.
FE Alpha Manager Barnett said UK stocks have faced a challenging period since the EU referendum, which has been reflected in his funds’ performance – as have several stock-specific issues over the past 12 months.
The £4.5bn Invesco Perpetual Income fund is down by 1.9 per cent over this time and the £9.4bn Invesco Perpetual High Income fund has fallen by 1.4 per cent, compared with a 9.4 per cent gain for the average IA UK All Companies sector fund and the FTSE All Share index.
Performance of funds vs sector & index over 1yr
Source: FE Analytics
“I’m still looking for the same qualities of businesses that I want to own,” said Barnett. “I’m still appraising valuation in the same way that I’ve always appraised it.” 
He added: “I’m owning up to the fact that it hasn’t been a great time, but am I going to change the way I do things?
“No, I’m not, and I do believe that this process, which has served me very well over many, many years, will come back strongly in the future.”
Barnett (pictured) was sanguine about the prospects for the UK economy, expecting GDP growth of 1.5 per cent over the course of 2018, despite weaker weather-related economic data during the first quarter.
“I think the outlook for the UK economy is okay, but nothing stunning,” he said. “I don’t expect it to deteriorate or soften any further than it has done. On the other hand, it’s unlikely that it will accelerate significantly from here.”
As such, the FE Alpha Manager has continued to back companies that derive a greater part of their revenues from the UK following the de-rating of domestically focused stocks over the past 12 to 18 months.
Since the EU referendum, the UK market has lagged its international peers with the FTSE All Share rising by 29.14 per cent compared with a 35.36 per cent gain for the MSCI AC World index, in sterling terms.
Performance of indices since EU referendum
Source: FE Analytics
However, Barnett said pessimism around the UK economy and the exit of international investors from domestically focused companies have thrown up interesting opportunities.
“Over a medium-term time frame, I expect a number of businesses to continue to be able to perform well enough in this environment to more than justify the current share prices,” he added.
One area he has focused on is the retail space where, notwithstanding the challenges posed by the impact of online competition, there are still some companies that look attractive.
“Most companies facing the high street have been de-rated and there are some opportunities to pick up well-run businesses at very reasonable prices,” he explained.
The Invesco Perpetual manager said he has added exposure to companies that have worked out ways to navigate the many challenges facing the retail sector.
Barnett has also maintained his exposure to financial stocks although he remains bearish on UK banks for numerous reasons.
“The big issue around high street banks is that they are not growing,” he said. “They are fundamentally highly regulated business and much more so since the financial crisis over the last 10 years and that is not going to change any time soon.
“They are phenomenally complicated businesses that are being challenged in a number of different respects with regard to the core banking relationship people have.”
While the banks are beginning to adapt to modern trends, with the development of apps, Barnett said they still face huge legacy issues.
In the financials space, he instead prefers insurers – both life and non-life – and real estate, where valuations have been hit by the fall-out from the EU referendum and are now trading on significant discounts.
“I have some London-centric exposed companies, like Derwent London, a London developer, and British Land, again a big London developer,” he explained.
“But I go broader than that where I’m looking out for some income-focused stocks, like Assura, which is GP surgeries, or Real Estate Investors, which is focused on the West Midlands, Birmingham in particular, or Secure Income REIT, which is looking for long-term income-generating assets with long leases.”
In the resources sector, Barnett has taken a mixed approach, eschewing mining stocks in favour of oil companies.
The equity income manager said mining stocks’ dividends are “very explicitly linked to earnings” and more subject to the movement of prices of the metals they focus on. Oil, meanwhile, has a more stable demand, he said, and is less dependent on Chinese growth to drive prices higher.
Over three years Invesco Perpetual Income is up by 6.62 per cent while the Invesco Perpetual High Income fund has delivered a total return of 9.55 per cent. In comparison the peer group average is up by 24.82 per cent and the FTSE All Share index has returned 26.48 per cent.
Performance of funds vs sector & index over 3yrs
Source: FE Analytics
The Invesco Perpetual Income fund has a yield of 3.20 per cent and an ongoing charges figure (OCF) of 0.91 per cent. Invesco Perpetual High Income has a yield of 3.26 per cent and an OCF of 0.92 per cent.