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Fund of the Fortnight – Invesco Perpetual High Income

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Written by: Tom White, Senior Research Analyst at Tilney Bestinvest
20/02/2015
The £12.9bn Invesco Perpetual High Income fund was for years synonymous with one man, Neil Woodford.

He became manager in 1988 and took control of its sister fund, Invesco Perpetual Income, in 1990. He shot to fame in the late 1990s when he ignored the speculative internet stocks that were then flavour of the month, instead favouring stable, “dull” sectors like utilities. Initially this led to sharp underperformance and attracted much criticism, but when the tech boom crashed in 2000 those same dull stocks shot both funds to the top of the performance charts.

The funds’ success continued in the 2000s and, when Woodford announced plans to set up on his own in late 2013, it seemed like he would be almost impossible to replace.
However, Invesco Perpetual didn’t have to go far to find a successor – one of the UK’s top income managers already worked alongside Woodford. Mark Barnett began his career with Mercury in 1992 after leaving Reading University, moving to Invesco Perpetual in 1996. He was given control of the Perpetual Income & Growth Investment Trust in 2000 and then the Keystone Investment Trust in 2003. In 2006 he was given his own unit trust, Invesco Perpetual UK Strategic Income. And almost unnoticed, Barnett put together a track record that over many time periods was superior to Woodford’s.

Barnett’s style is in many ways similar to his predecessor’s. He favours companies with growing dividends and predictable earnings, often those with barriers to entry, and invests for the long term. These traits often lead him to have sizeable investments in favourite companies and sectors, though not to the same extent as Woodford. A 32 per cent weighting in the pharmaceutical sector has been cut to a still hefty 20 per cent since Woodford’s departure, whilst positions of almost 10 per cent in both GlaxoSmithKline and AstraZeneca have been reduced to below 5 per cent.

The Invesco Perpetual High Income fund invests in companies of all sizes, but the bulk of exposure is to large and mid-sized companies – 56 per cent is invested in FTSE 100 companies, 18 per cent in the FTSE 250 and another 12 per cent in larger overseas companies –tobacco maker Reynolds American is currently one of the largest holdings. The portfolio is on the face of it highly diverse, with over 130 holdings. However, the top 30 of these make up 75 per cent of the fund and there is a long tail of often tiny positions – the smallest 60 holdings make up just 4 per cent of the fund. This tail includes a large number of unquoted companies, and this part of the portfolio has brought the fund some notable successes over the years. One of 2014’s largest IPOs, Circassia Pharmaceuticals, is a graduate of the High Income fund’s unquoted portfolio and remains a holding.

However, the Invesco Perpetual High Income fund is not without its negatives. Barnett is now running around £23bn in assets across all his funds, compared to just £2bn before Woodford left. Successfully running large amounts of assets is not impossible, as Woodford has shown, but it does reduce flexibility. And the fund’s yield is below that typically available from UK equity income funds, so much so that it was booted out of the IA UK Equity Income sector last sector – it now resides in the UK All Companies sector.

Over his career Barnett’s more cautious style has provided investors with some protection from market falls, but he has also held his own in rising markets. And over the market cycle he has generated substantial outperformance. Initial results suggest he is more than capable of filling Woodford’s shoes, making Invesco Perpetual High Income a solid choice for investors looking for a yield-focused UK equity fund.

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