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Invesco Income - domestic companies hurt, but offer good value

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Financials companies currently make up a large part of the fund
  • A focus on domestically focused UK companies held back performance in recent years
  • Mark Barnett has a good longer-term record of income investing

Our view

Mark Barnett is an experienced income investor. He's managed equity income portfolios for 20 years and over that time he's built a strong track record.

All fund managers go through periods of poor performance though. It’s happened to Barnett over the past few years. Investments in domestically focused businesses, and problems at some individual companies, have held back performance.

It's been a disappointing few years. But we don't think Barnett has turned into a bad fund manager overnight. He's invested the Invesco Income Fund quite differently from other UK funds. This means performance will be different, but over the long term it could help deliver good returns.

Many of the companies Barnett invests in are severely out of favour at the moment. If sentiment changes, performance could improve. There are no guarantees though and the fund could still fall in value.

The fund currently yields 3.6%, though this is variable and not a reliable indicator of what the fund will pay out as income in future. While the manager aims to pay an income, he doesn't target a specific level of income. He tries to generate a good total return, which combines both income and capital growth.

The fund isn't currently on the Wealth 50 as the list is focused on other excellent income funds, which are managed at a lower cost.

What's hurt performance?

Barnett focuses on unloved, but financially strong companies. He invests when their share prices and valuations are low, then waits patiently for the business to improve or the sector to return to favour.

This has led him to increase his investments in domestic companies in recent years. But they’ve remained out of favour, not helped by fears over Brexit and other political upheaval, and this held back performance.

Having no exposure to metals and mining companies also hasn't helped over the past year as they performed better than most other sectors. Barnett doesn’t like how closely their earnings (and therefore their dividends) are tied to volatile commodity prices, so he's happy to keep them out of the fund.

A rising oil price also dragged on investments in Thomas Cook and easyJet, as it increases airlines’ costs. The uncertainty of Brexit also put some people off travelling and reduced demand for travel companies' services.

The tobacco sector is still a key theme in the fund and includes investments in British American Tobacco and Imperial Brands. They’ve delivered strong returns and dividends over the long term, but struggled last year because of worries about tighter regulation and how "new generation" products could affect demand for traditional tobacco products. Barnett thinks these companies are capable of creating innovative new products, so he's kept hold of them for now.

Like all diversified portfolios, there's been some good performers in the fund as well. This includes some of the domestically focused companies, such as investment company AJ Bell and Burford Capital, which provides financing for legal cases.

Annual percentage growth
Jun 14 -
Jun 15
Jun 15 -
Jun 16
Jun 16 -
Jun 17
Jun 17 -
Jun 18
Jun 18 -
Jun 19
Invesco Income 10.2% -0.2% 14.2% -3.2% -7.1%
FTSE All-Share 2.6% 2.2% 18.1% 9.0% 0.6%

Past performance is not a guide to the future. Source: Lipper IM to 30/06/2019

Where else is the fund invested?

A large part of the fund invests in the financials sector, currently 41.7%. This includes a wide variety of finance companies, including life insurance, property and investment companies.

The manager hasn't invested in any mainstream banks for a number of years, but that changed recently when he invested in Royal Bank of Scotland. He thinks it's in a stronger position than other UK banks and could pay higher dividends to shareholders in future. On the other hand, investments in pharmaceutical company AstraZeneca and publisher RELX were sold.

He invests across companies of all sizes, including large, medium-sized and smaller companies. The smaller companies won't contribute much to the fund's income, but they help boost long-term growth potential. They're also higher risk.

4.9% of the fund is currently invested in private, or unquoted companies, which aren't currently listed on a stock market. The amount invested in this type of company has reduced slightly over the past year and Barnett is unlikely to actively increase exposure much from current levels.

A missed opportunity?

Domestically focused UK companies have underperformed in recent years. But this means they now look much better value than other parts of the market. In many cases their share prices have been unfairly punished, simply because of their ties to the UK.

Barnett thinks the outlook for the UK economy is much brighter than many people think. Over the course of 2019 rising household incomes and employment could boost consumer spending and economic growth. If domestic companies can keep growing their profits, and the UK economy remains robust, their shares could rise once investor sentiment changes. Though of course there are no guarantees.

Please note the fund’s charges are taken from capital. This helps boost income but reduces the potential for capital growth.

More about this fund, including charges

Key Investor Information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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