Is Mark Barnett, the UK equity income manager at Invesco Perpetual, the next Neil Woodford? Many believe he might be - but in the meantime, he's content to ply his trade as one of the country's best equity income managers.
"Only the chief executive knows the answer to that question," is how he side-steps questions about stepping into Mr Woodford's shoes. But his returns are doing his case no harm at all: as lead manager of the Perpetual Income and Growth Investment Trust since 1999, Mr Barnett has managed to deliver returns far superior to the FTSE All-Share index. The fund is one of the top three funds in the AIC UK Income & Growth sector, lagging Mr Woodford's Edinburgh investment trust by only 0.1 of a percentage point.
On the open-ended side, Mr Barnett also manages the Invesco UK Strategic Income Fund, one of the top performing UK equity income funds - over five years the fund's performance trumps that of the Woodford-managed billion plus Invesco Perpetual High Income Fund.
Unsurprisingly, Mr Barnett shares much of Mr Woodford's investment philosophy, choosing to focus on defensive sectors such as pharmaceuticals and tobacco, and keeping exposure to the financial sector small.
While recent quarterly figures for some pharmaceutical companies have not been stellar, Mr Barnett sees these as "one-offs" and believes the sector is still a good source of income. "The current volatility has lead the stock market to re-rate companies with a number of characteristics. One of those is the ability to grow earnings reliably. If the stock market expected that a company was going to be able to do that and it does not deliver, then the penalty in share price terms is harsh," he says, making reference to the likes of Tesco and AstraZeneca.
Mr Barnett adds: "The economic circumstances that we find ourselves in, particularly in the developed world, mean that the market is prepared to pay a higher price for reliability and assured earnings and cash flow growth. I think the rating on those companies will continue to improve."
Despite the ensuing volatility Mr Barnett believes that the stock market is offering exciting opportunities for an equity income investor. He points out that shares in many of the companies he owns offer a better dividend yield than their equivalent bonds, he says, pointing to the likes of Glaxo, Vodafone, BAT and BT. On top of this, dividends will grow whereas coupons are fixed. It is this combination which Mr Barnett says will become even more attractive to a long-term investor as market volatility continues.
"To my mind, the best income earners will continue to be companies with very strong cash flows that can benefit both from continued demand for their product from the developed world, and increasing demand for their product in the emerging worlds,” he says, highlighting the FMCG (fast moving consumer goods) and pharmaceuticals sectors as falling into this category. Mr Barnett also likes the UK telecoms sector, and in recent months has been topping up his holdings in BT and smaller telecom companies such as
"The story for well-managed fixed line telecom companies is a very powerful one. As the use of data by both businesses and consumers grows, investing in the telecom industry is, I believe, going to be very interesting."
Mr Barnett fiercely contests the view that fund managers are adopting a herd mentality by getting most of their dividend income from just a few mega-cap stocks. "If this was the case there would be a much narrower dispersion of returns. It's not sufficient to just look at funds' top ten holdings. You need to look beyond this and look at the weightings too," he says. Having said that, both his funds are particularly concentrated with around 45 per cent of assets held in the top 10 holdings - reflective, says Mr Barnett, of his high-conviction investment approach.
Dividend growth is far more important for him than yield. Not only is it what drives capital values, it is something the company controls, whereas yields are just a mathematical function of the share price. "That is why it is much more important to focus on the growth of the pay-out, because companies control that growth, rather than just looking for yield in the market," he explains.
"If you just target a static yield and that yield does not grow then you end up with a stock price which is likely to go nowhere. I am much more interested in finding companies that can grow dividends sustainably over the long term, even if that might be from a very low base. Over the long run, those are the companies the market values the most highly."
But are shares really that cheap, or has quantitative easing merely made gilts artificially expensive (and their yields correspondingly poor)? "There has been, without question, a de-rating in equities over the last decade, up to the peak in the valuations. If you look at just a very simple valuation of the stock market over the last 10 years, you see the decline, certainly in the UK, from mid-20s to say, ten times forward-looking earnings."
"I therefore think that, everything else being equal, equities are much lower risk now than they were a decade ago. Comparing the types of yield on offer in the equity market versus other asset markets, the relative attraction of equities is clear to me."
"Clearly there is volatility in the market, and when people want to sell something, they go to the most liquid asset, which is equities. But volatility aside, I think there is a huge store of value in the equity market. I believe over the medium term that will be realised."
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