Mark Barnett took over management of Invesco Perpetual's flagship income funds following Neil Woodford's departure in March 2014. Some people may have viewed this as a poisoned chalice. However, with 23 years' experience in the industry and a good track record in his own right, Mark Barnett is not a man to be intimidated.
Not one to let the grass grow under his feet, the manager has spent the past 18 months reshaping the funds to suit his own investment style. Some fund managers hang onto their predecessor's portfolio far too long, in my view. This could cause problems in the future so I am glad to see he has made these funds his own.
The funds were historically concentrated in their top ten holdings. Mark Barnett has increased diversification within the funds by reducing this concentration from 55%-60% to around 40%. The pharmaceuticals sector, previously a large portion of the funds, witnessed the biggest reduction. A position in GlaxoSmithKline was sold, while AstraZeneca was reduced from around 10% to nearer 4%. As exposure to healthcare was reduced, the manager increased the proportion invested in financials companies. Legal & General is a new addition to the portfolio and he has added to Provident Financial.
The funds currently have very little exposure to banks, but Mark Barnett has been eyeing potential dividends from the sector. Banks have worked to reduce risk, hold significantly more capital, and are more tightly regulated than they were prior to the financial crisis. Provided capital requirements are not increased further many banks will soon be in a position to return surplus cash to shareholders, according to the manager.
Elsewhere, the manager has initiated a position in BP. He believes the oil giant has transformed itself since the Deepwater Horizon disaster in the Gulf of Mexico. Ironically, this costly event gave the company a head start in cutting costs. It forced them to recognise their suppliers made large profits from the booming oil price while taking on little of the risk. They have since negotiated better fee structures which means they are now in an excellent position for the future, in the manager's view. The recent collapse in the oil price negatively affected BP's share price, although it now yields an attractive 6.6% and Mark Barnett is confident the firm's cost reductions will allow the dividend to be maintained.
While oil will always be in demand, the requirement for raw materials is more closely linked to global growth. Although mining firms have been reducing their capital expenditure, the manager feels dividends in the sector are under threat from slowing growth in China - a country that consumes a vast amount of the world's raw materials. As such, the funds currently have no exposure to this area.
Similar to his predecessor, the manager predominately focuses on firms paying sustainable dividends. He is cautious in his outlook for the UK economy and expects many companies will be forced to cut dividends by the end of 2016. He is therefore happy investing in companies with lower yields, which he believes are able to grow dividends over time. This includes companies such as AA, which does not currently pay a dividend, and Card Factory, which yields 1.8%. This is a sensible approach in my view.
Our view on these funds
In my view, running an equity income portfolio is not simply a case of investing in companies paying the highest yields. I view Mark Barnett's focus on firms with strong balance sheets, resilient earnings and the potential to increase dividend payments as a more sensible approach. This way, I would expect to see greater potential for long-term income and capital growth.
The funds do not currently feature on the Wealth 150 list of our favourite funds for new investment across the major sectors. We feel there are currently superior alternatives in this competitive sector, which are also managed at a lower ongoing charge.
Read the key investor information document for the Invesco Perpetual Income Fund.
Read the key investor information document for the Invesco Perpetual High Income Fund.
Read the key investor information document for the Invesco Perpetual UK Equity Pension Fund.