While Invesco Perpetual UK equity income manager Mark Barnett (pictured) has found himself in the ninth decile for his returns over the last year, many investment professionals warn against selling his funds in haste. 
That said, some commentators are concerned about the large size of the three open-ended funds and whether the manager is overstretched, given the number of portfolios he runs.
The likes of AJ Bell’s Ryan Hughes, Brewin Dolphin’s Tom Jemmett and Downing’s Neil Shillito point out that the manager’s decision to underweight oil & gas has led to a temporary dip in performance, which is to be expected.
Despite plummeting in price by more than 60 per cent over the 18 months before the end of 2015, Brent crude oil has seen a significant rebound in 2016, with the S&P GSCI Brent Crude Spot index up 68.87 per cent year-to-date.
Performance of index in 2016
Source: FE Analytics
While the FTSE All Share index (which Barnett’s three open-ended funds aren’t benchmarked against but most of his peers are) has 11.58 per cent in the oil & gas sector, the Invesco Perpetual Income, High Income and UK Strategic Income funds all hold 4.25, 4.32 and 4.28 per cent in the market area respectively.
The FE Alpha Manager is not alone in his positioning though, given that his average peer in the IA UK All Companies sector holds just 4.09 per cent in the sector and has also underperformed the All Share over the last year.
Barnett has managed the five crown-rated Invesco Perpetual UK Strategic Income fund for more than a decade, but took over the Invesco Perpetual Income and Invesco Perpetual High Income funds from Neil Woodford in 2014. Since then, all three funds have comfortably outperformed their average peer.
Performance of funds vs sector since 6 March 2013
Source: FE Analytics
However, performance has been turbulent recently. While the Income, High Income and Strategic Income portfolios all outperformed their sector average by more than 10 times over in 2014 and were in the top and second quartile in 2015, they are in the ninth or tenth decile for their returns year to date.
It was announced last week that Barnett will be taking a step back from managing the Invesco Perpetual Select UK Equity trust – one of four closed-ended mandates that he also runs – after spending a decade at its helm.
Should investors be concerned about his funds’ recent returns or is this purely down to sector weighting? Also, does taking a step back from one of his investment vehicles mean he will have more time to focus on the funds he is currently running?
Ryan Hughes, head of fund selection at AJ Bell, says there is a clear picture behind the manager’s recent underperformance and attributes it to his underweight in oil & gas, mining and a number of other sectors that have recently seen a sudden surge in performance.
“At a stock specific level, his largest underweight has been Royal Dutch Shell, which has performed very strongly due to the recovery in the oil price. At the same time, Mark has been running a significant overweight in financials which have broadly underperformed the UK market,” he explained.
“Given Mark’s approach, the recent underperformance does not come as a huge surprise to me as I’d fully expect Mark to lag in a market where higher beta names are driving performance.
“While short-term performance may appear to be disappointing, it is important to remember the excellent long-term track record that Mark has built along with his very strong performance in 2015 when market conditions were very different.”
In terms of the manager taking a step back from the Invesco Perpetual Select UK Equity Trust, Hughes adds that Barnett has significant responsibility in his position as head of UK equities and that handing over responsibility of the trust is a sensible way to tidy up some of the smaller portfolios that he manages.
Tom Jemmett, fund analyst at Brewin Dolphin, says the firm owns Mark Barnett through his open-ended High Income fund and through his closed-ended vehicles.
He agrees commodity positioning is the primary reason why Barnett - alongside many of his peers - are underperforming the FTSE All Share. He adds that top-quartile performance is required in order for UK fund managers to beat the index this year.
“Barnett’s process has a focus on dividend growth and dividend sustainability so underweight positions to these sectors are, arguably, understandable,” he said.
“Stock selection in the healthcare sector maybe something to keep an eye on, however we back Barnett’s process to outperform over the market cycle and these short-term performance horizons, although useful, don’t hold much sway in our recommendations.
“It’s worth noting the fund is up this year and has not lost investor’s money on a year-to-date basis.”
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
On the other hand, Informed Choice’s Martin Bamford doesn’t hold any of Barnett’s funds as he had concerns about capacity when the Income and High Income portfolios were managed by Neil Woodford. Given that the funds have remained large since Barnett took on sole management responsibility in 2014, they have still not appeared in the firm’s research.
“The combined mandate of some £18.6bn in the three income funds could go some way towards explaining a period of short-term underperformance. When a fund gets too large, it can become more challenging for the manager to deliver value for investors,” he warned.
“We also have some concerns that Barnett is overstretched at Invesco Perpetual. Despite his recent decision to step down from the management of the Select UK investment trust, he continues to be head of UK equity, also running the Edinburgh, Perpetual Growth & Income and Keystone investment trusts.
“Another reason for poor performance this year was Barnett taking a hit on his Capita holding, a top 10 position in his Income and High Income funds.”
That said, Bamford notes that investors should adopt a long-term time horizon and that poor relative performance over 12 months is unlikely to be an indicator of a prolonged period of underperformance.
“I have no doubt that Barnett and the team at Invesco Perpetual will be taking this blip very seriously and putting measures in place to reassure investors,” he added.
Downing’s Neil Shillito says that his firm also has no exposure to the manager at the moment, although this is because large funds don’t fit well with its strategy of investing in niche, boutique funds.
“The rally in the FTSE 100 since February of this year has probably not done him any favours,” he said.
Performance of index in 2016
Source: FE Analytics
“The performance of the FTSE has been driven by oil, commodities, tobacco and pharma. No doubt he will have been invested in these stocks to some extent but he will not have been able to ride the whole wave.
“Never write off a manager of his experience just because he’s going through a ‘rough patch’. It must also be remembered that very often the percentage difference between first and fourth quartile can often be very small.”