The fund management industry was rocked last year by the news that star manager Neil Woodford would be leaving Invesco Perpetual after 25 years of service. The group announced that Barnett, who currently runs the five crown-rated Invesco Perpetual UK Strategic Income fund, would take on the responsibilities for Woodford’s High Income and Income funds – which combined have assets under management of more than £20bn.
However, Willis is moving Whitechurch’s clients’ funds into the much smaller £387m Invesco Perpetual UK Strategic Income portfolio, which Barnett has run since 2006.
“We had a position in Invesco Perpetual High Income and so following the news Woodford would be leaving we were looking for managers who displayed the same attributes in terms of risk-adjusted returns,” Willis said. “Funnily enough, the closest person we could find was Mark Barnett himself.”
Willis admits that it is a slightly left-field decision. However, he says that he and his colleagues at Whitechurch need a core UK equity income fund for their clients and are worried about the possible effects of outflows on the larger funds.
“We could always keep our exposure, however the key risk of that is if we stick with High Income there could be a run on it as Woodford’s departure day draws closer. Instead we are buying Barnett’s Invesco Perpetual UK Strategic Income fund,” he said.
Willis says Invesco Perpetual High Income should still perform well over the medium- to long-term under Barnett. However, he is concerned external factors, such as outflows, could mean the fund underperforms, as the new manager may be forced to sell at a knock-down price for reasons of liquidity.
Since Woodford’s departure was announced in October, his High Income fund has decreased in size by £300m to £13.5bn, while his Income fund has contracted by £1.2bn to £9.3bn.
Although Woodford will be working with Oakley Capital after he has left Invesco, little is known as to what sort of fund he will be running. Willis expects that when there is more information about Woodford’s future, the flow of money out of his current funds will gather pace.
As a result, he wants a core UK equity income fund – he expects it to be a very rewarding area of the market over the medium-term – but he doesn’t want one that is affected by factors that are out of the manager’s control.
“We moved a position into that fund as it is a lot smaller, so there isn’t much chance of redemptions. If you want a core equity income fund for 2014 that can give you risk-adjusted returns, then I would choose this one.”
Some of the funds that have been growing in size as investors pull their money out of the Invesco funds and look for alternatives have been multi- or small- cap in nature, but Willis is looking for a different sort of portfolio.
“I wouldn’t pick one of the equity income funds that invest in just small caps or anything like that as we don’t want it to shoot the lights out, we just want core exposure,” he said.
Barnett took over the Invesco Perpetual UK Strategic Income fund in January 2006.
His fund is the sixth best performing portfolio in the IMA UK Equity Income sector since then with returns of 104.14 per cent and has beaten the FTSE All Share by close to 35 percentage points. It has also beaten both Woodford’s High Income and Income funds.
Performance of funds vs sector and index since Jan 2006
Source: FE Analytics
However, it is important to point out that this relative outperformance has occurred in rising markets.
One of the possible reasons for this is Barnett’s higher weighting to mid caps, an area of the market that Woodford (pictured) would not have been able to gain as much exposure to as his funds grew in size. A combination of a higher risk appetite among investors, low valuations and an improving economy has meant the more domestically focused FTSE 250 has more than doubled the returns of the FTSE 100 since the period after the financial crash.
As the graph below shows, Invesco Perpetual UK Strategic Income has taken advantage of the rising market more effectively.
Relative performance of funds since Jan 2006
Source: FE Analytics
While Willis is happy with his new allocation, he admits that the future of the Invesco Perpetual UK Strategic Income fund lies in the balance.
When asked whether he thinks Barnett will continue to run his current fund as well as the flagship High Income and Income funds, he said: “This is the question we have posed to him.”
“As far as we know, he will continue to run the UK Strategic Income fund as well as the inherited funds.”
“The thing we want reassurance on is that he will be able to continue to successfully manage the UK Strategic Income fund and the additional workload from the inherited funds does not impinge or impede him from doing that.”
“He has been running a number of UK equity mandates for a long time and he is already managing some investment trusts as well, but he has never been given £20bn funds before. We can only assume that the proof of the pudding will be in the eating.”
“I say we are backing him for 2014, but really we are giving him between six to 12 months to see how his new responsibilities will affect his current fund. However, in the meantime we are quite happy with our allocation,” he added.
For those looking to follow Willis’s recommendation, Invesco Perpetual UK Strategic Income has a yield of 3.16 per cent. It has an ongoing charges figure (OCF) of 1.2 per cent and requires a minimum investment of £1,000.
