A couple of weeks ago, Neil Woodford, one of the UK's most renowned fund managers, announced that he would leave Invesco Perpetual in April to set up his own fund management company.
The news came as a nasty shock, not only to those invested in Mr Woodford's funds, but also those concerned about the impact any changes to the way the funds invest could have on the share prices of their many holdings. Not only does Mr Woodford have an outstanding long-term track record, he also runs a massive amount of money - around £30bn. In particular, Invesco Perpetual Income (GB0033053827) and High Income (GB0033054015) funds alone account for over 36 per cent of the money private investors have in UK equity income funds. Mr Woodford also runs IC Top 100 Funds Edinburgh Investment Trust (EDIN) and the equities portion of Invesco Perpetual Distribution (GB0033947333), and manages the Invesco Perpetual UK Equity Pension and the equities portion of Invesco Perpetual Monthly Income Plus Fund (GB0033947333).
The new head of equities and successor to Invesco Perpetual Income and High Income funds, and UK Equity Pension Fund, is Mark Barnett, who has made impressive returns with IC Top 100 Fund Perpetual Income & Growth Investment Trust (PLI) and Invesco Perpetual UK Strategic Income Fund (GB00B1W7J535), both of which he will continue to run. He will also continue to run Keystone Investment Trust (KIT) and the UK equity portion of Invesco Perpetual Select Trust (IVPU). The equities portions of Invesco Perpetual Monthly Income Plus and Invesco Perpetual Distribution will be managed by Ciaran Mallon. The bond components which make up most of the assets of these funds will continue to be managed by fixed-income managers Paul Causer and Paul Read.
Nevertheless, there is a great deal of concern about how Mr Barnett will manage to run all those funds and that amount of money, and many advisers are already suggesting a switch out of Invesco Perpetual Income and High Income. The greater volume of money means Mr Barnett is unlikely to be able to manage these funds in a similar way to the much smaller Invesco Perpetual UK Strategic Income, which had assets of only £297m at the end of September. This has enabled him to invest in mid-caps which have helped the strong performance, while in Perpetual Income & Growth Investment Trust he also holds small-caps. But he may not be able to take meaningful positions in smaller companies with Income and High Income: managers don't always want to have too much of one company, even if it represents a small portion of their large fund.
If a lot of money flows out of Invesco Perpetual Income and High Income, the funds could be forced to sell holdings to meet redemptions, which could also constrain Mr Barnett. The funds could impose dilution levies on exiting investors to try and stem this, so this could be another argument for getting out now – before anything like this is imposed. And there are past examples of where a successor to a star hasn’t lived up to his predecessor, such as Sanjeev Shah who took on Anthony Bolton's Fidelity Special Situations Fund (GB0003875100).
We round up some of the views of advisers and analysts on whether to stay in Invesco Perpetual Income and High Income, or seek out new investments.
Income funds - Invesco and beyond
| Fund | Yield (%) | 1-year cumulative total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | *Ongoing charge (%) |
|---|---|---|---|---|---|
| Artemis Income Inc | 4.34 | 24.84 | 41.95 | 109.03 | 1.54 |
| Cazenove UK Equity Income B Inc | 4.05 | 32.15 | 61.51 | 145.49 | 1.62 |
| Fidelity Enhanced Income Acc | 6.21 | 15.91 | 35.24 | na | 1.73 |
| Invesco Perpetual High Income Inc | 3.71 | 23.9 | 45.29 | 92.9 | 1.69 |
| Invesco Perpetual Income Inc | 3.62 | 24.59 | 45.29 | 92.78 | 1.68 |
| Invesco Perpetual UK Strategic Income Acc | 3.57 | 32.41 | 56.76 | 118.52 | 1.7 |
| Threadneedle UK Equity Alpha Income RN GBP | 4 | 36 | 60.74 | 122.53 | 1.64 |
| Threadneedle UK Equity Income Ret Net GBP | 3.98 | 30.41 | 53.12 | 121.94 | 1.62 |
| Unicorn UK Income B Inc | 2.88 | 46.05 | 88.36 | 264.83 | 1.59 |
| FTSE All Share TR GBP | 22.2 | 35.41 | 118.65 | ||
| IMA UK Equity Income sector Average | 26.45 | 41.45 | 113.28 | ||
Source: Morningstar, *Fund provider. Performance data as at 28 October 2013 | |||||
Should I Go?
"Mr Barnett currently only manages around £1.4bn across four funds versus Mr Woodford's almost £30bn," says Justin Modray, founder of independent financial adviser Candid Financial Advice. "Assuming responsibility for such a significantly larger sum of money could prove very challenging. He will likely need to need to invest in more stocks and place larger big picture bets than he is used to in order to add meaningful value to the funds. For example, Mr Woodford's High Income and Income funds hold 118 and 127 companies respectively, with the 10 largest holdings accounting for 57 per cent of each fund. By contrast, Mr Barnett's UK Strategic Income fund invests in 74 companies with the 10 largest holdings comprising just 40 per cent of the fund."
He adds: "Since it is so straightforward and cheap to switch funds via platforms these days, I think there is a strong argument for investors in the Invesco Perpetual High Income and Income funds to consider moving to alternatives over the coming months. There are proven equity income managers elsewhere running far more manageable sized pots of money."
Analysts at fund information site FundExpert point out that because of Mr Woodford's inability to take meaningful positions within mid- and small-cap companies, a number of professional investors have already started moving out of his fund this year, with more than half a billion pounds withdrawn from these two funds.
These include wealth manager Sanlam Private Investments which removed these two funds from its White List of recommended UK equity income funds. "The funds have a long-established negative view on the economy and have selected defensive holdings that can ride out a period of low growth," explained Sanlam. "This, and the [huge amount of] assets under management, has led the portfolios to become very focused in many of the very large stocks in the market. We would prefer managers who are able to be more pragmatic in the face of swiftly changing circumstances."
FundExpert says the move away from Invesco Perpetual Income and High Income is indicative of the view that the outlook for the UK economy is improving, with these investors rotating out of defensive stocks (such as these funds hold) into more cyclical areas.
"Neil Woodford has taken a big macro bet for 15 years or so, focusing on defensives in an uncertain world," they add. "At some point Neil Woodford would have switched that call - and this would have been a big one. Yet there is no evidence that Mark Barnett can make that call."
When deciding what to do, FundExpert also suggests that you should ask yourself why you bought the fund in the first place. Did you simply buy into Neil Woodford? Were you interested in total return (growth) or income? And how do you identify the few other outstanding funds?
"Many did buy Woodford so investors in this category should explore alternatives," they say. But they add that, if you have no more than 10 per cent of your portfolio value in Woodford funds, there is no need to panic, though if it is greater alternatives should be considered.
Tim Cockerill, investment director at Rowan Dartington, is concerned that the size of outflow could potentially depress some stocks’ values within the fund (see our analysis of this below) so says that exiting sooner might be best.
Manager issues aside, don't forget to check your tax situation. If your holding is not held in a pension or individual savings account (Isa), you may incur a tax charge when you sell it.
Invesco liquidity
| Company | Market cap (£m) | Share price performance year-to-date (%) | Bid/offer spread (%) | Analyst coverage | Average daily volume in past 100 days | Free float (m) | Share turnover ratio (%)* |
|---|---|---|---|---|---|---|---|
| Daisy Group | 435 | 77 | 4 | 7 | 22,246 | 156.66 | 1 |
| Imperial Innovations | 448 | 41 | 10 | 2 | 12,723 | 67.95 | 2 |
| e-therapeutics | 79 | -12 | 3 | 2 | 54,975 | 233.27 | 2 |
| McBride | 204 | -12 | <1 | 6 | 84,041 | 180.3 | 5 |
| IP Group | 561 | 27 | 1 | 2 | 178,934 | 365.81 | 5 |
| PayPoint | 699 | 26 | <1 | 7 | 37,365 | 64.66 | 6 |
| Cranswick | 521 | 27 | <1 | 8 | 30,143 | 44.56 | 7 |
| Retroscreen Virology | 177 | 140 | 6 | 1 | 33,121 | 45.25 | 7 |
| Halosource | 29 | -40 | 18 | 2 | 114,685 | 156.37 | 7 |
| Immunodiagnostic Systems | 139 | 51 | 3 | 8 | 18,752 | 18.98 | 10 |
| Homeserve | 770 | -1 | <1 | 10 | 311,283 | 278.1 | 11 |
| Bunzl | 4,510 | 36 | <1 | >10 | 412,602 | 325.8 | 13 |
| GlaxoSmithKline | 80,100 | 24 | <1 | >10 | 6,700,000 | 4861 | 14 |
| Breedon Aggregates | 357 | 63 | 3 | 4 | 1,360,724 | 948.71 | 14 |
| Stobart | 482 | 31 | <1 | 2 | 399,953 | 267.89 | 15 |
| BAE Systems | 14,600 | 35 | <1 | >10 | 5,100,000 | 3210 | 16 |
| Rentokil Initial | 2,340 | 19 | <1 | >10 | 2,900,000 | 1790 | 16 |
| Helphire | 80 | 254 | <1 | 1 | 2,765,899 | 1270 | 22 |
| Vernalis | 126 | 27 | 2 | 2 | 1,199,158 | 436.67 | 27 |
| Chemring | 431 | -2 | <1 | 7 | 686,478 | 189.03 | 36 |
| Sterling Energy | 85 | -2 | <1 | 5 | 821,714 | 71.02 | 116 |
Source: Bloomberg, S&P Capital IQ & Investors Chronicle *Share turnover ratio is total volume for last 100 days/share free float (%) | |||||||
Or should I stay?
Ben Gutteridge, head of fund research at Brewin Dolphin, argues: "Mr Barnett's ability is no better demonstrated than in the performance of Perpetual Income & Growth Investment Trust: since he assumed control in 1999, the trust has delivered an annual return of 11.1 per cent versus 4.3 per cent from the broader UK equity market. This alpha generation, combined with a proven ability to grow dividends, leaves us feeling very comfortable with Mr Barnett."
But he adds: "Though we would not be encouraging clients to sell at this time, our own internal processes require a further review meeting to be undertaken to determine whether we would support additional purchases."
Similarly, Adrian Lowcock, senior investment manager at Hargreaves Lansdown, has no concerns if investors wish to continue saving regularly into these funds.
Delyth Richards, head of funds research at Kleinwort Benson believes that, "if we move into a rising interest rate environment, Mark Barnett's style of management could potentially be better suited." Jason Hollands, managing director at Bestinvest, notes that "Mr Woodford and Mr Barnett have worked together for nearly 20 years. Their styles are very similar, with a high crossover of stock names between their respective portfolios. But whenever there is a manager move, it is important to reappraise the view for holding a fund."
Meanwhile Martin Bamford, managing director of independent financial adviser Informed Choice, might "recommend these funds in the future, assuming they become smaller and nimbler due to mass investor redemptions."
Where should I go?
If you decide to quit Invesco Perpetual Income and High Income, what are the alternatives?
We include eight equity income funds in our IC Top 100 Funds. These include Fidelity Enhanced Income (GB00B3KB7799), a traditional, defensive UK equity income fund with a similar composition to the Invesco Perpetual Income and High Income funds. But it is smaller and more nimble and uses a covered calls derivative strategy with which it can boost its yield to around 7 per cent.
Investors could also consider Artemis Income (GB0006572464), favoured by many advisers and analysts, and which Mick Gillgan, head of research at broker Killik, says implements a similar strategy and exhibits a high level of historical correlation to Invesco Perpetual Income.
Some of you may hold Mr Woodford's funds for growth as they were run with a total return mandate. For UK growth alternatives, also see our IC Top 100 funds. But a number of UK equity income funds make good total returns as well as offering a reasonable yield.
These include Threadneedle UK Equity Income (GB0001448900) and Threadneedle UK Equity Alpha Income (GB00B12WJY78) which are popular with advisers and analysts. The funds blend defensive and more economically sensitive names to produce a solid income and absolute return, and are first quartile in terms of total return over one, three and five years in the UK Equity income sector. Threadneedle UK Equity Alpha Income is an IC tip.
Mr Cockerill suggests Mark Barnett's UK Strategic Income Fund which is among the top 25 per cent of performing UK equity income funds over one, three and five years.
Mr Hollands suggests Cazenove UK Equity Income (GB00B073JG03) which is considerably smaller than many UK equity income funds with assets of around £500m per cent but which has an approach he regards as very scalable, and is among the top 10 performers in its sector over three and five years.
He also suggests IC Top 100 Fund Unicorn UK Income (GB00B00Z1S94) which focuses almost exclusively on smaller companies. "Performance has been stellar under the stewardship of John McLure," he says. "Mere crumbs off the Woodford table could make the fund a candidate for soft closure in our view, so investors inclined to take a different approach to equity income might consider acting sooner rather than later."
We also highlighted in our tip on this fund that it is a great buy for income and growth.
