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Barnett eyes revival and 'refines' unquoted portfolio

Manager of Invesco Perpetual Income and High Income funds believes his process 'will come back strongly' after poor performance.

 
Barnett eyes revival and 'refines' unquoted portfolio
 

Mark Barnett has said his investment process can 'come back strongly' after a poor run of performance that has sent his Invesco Perpetual Income and High Income funds towards the bottom of the performance charts.

Over the last year, the £9.4 billion High Income fund has lost 2.2% and the £4.5 billion Income fund is down 2.6%. Over that period, only Neil Woodford, Barnett's predecessor on the funds, has performed worse among UK All Companies funds, with his flagship £6.7 billion Woodford Equity Income fund down 9.8%.

Barnett has been hit by some of the same slumps for key holdings as his former colleague Woodford. Heavy share price falls for Provident Financial (PFG) and Capita (CPI) have taken their toll on the funds

Barnett also shares with Woodford an enthusiasm for UK domestic-focused stocks that have been strongly out-of-favour since the Brexit vote. Both managers believe those stocks have been unfairly derated and present the biggest opportunity in the UK stock market, but they have weighed down returns over the last two years.

Barnett admitted it had been a difficult period. 'I’m owning up to the fact that it hasn’t been a great time, but am I going to change the way I do things? No, I’m not,' he said.

'I do believe that this process, which has served me very well over many, many years, will come back strongly in the future.'

Banks and oil divide Woodford and Barnett

While Barnett's portfolios do share some similarities with Woodford's funds, the Invesco manager's comments also served to underline the differences between the two.

Barnett has remained a bear on banks while Woodford, who famously shunned lenders during the financial crisis, bought Lloyds (LLOY) last year and added Barclays (BARC) and Royal Bank of Scotland (RBS) to funds he runs for national advice group St James's Place (SJP).

'The big issues around high street banks is they really are not growing,' he said.

'They are, fundamentally, highly regulated businesses, and have become much more so obviously since the crisis over the last 10 years. That’s not going to change, to my mind, any time soon.'

Barnett 's holdings in oil giants Shell (RDSb) and BP (BP) also contrast with Woodford's shunning of the oil and gas sector. Both have helped to take the edge of the funds' poor run over the last year, as their shares have rallied along with the oil price rise.

'I’m not holding these businesses because I happen to believe in a sustainably higher oil price, although the oil price is a help,' said Barnett.

'It’s certainly a tailwind for these companies, but the rationale of the investment case for these businesses is that, even in an oil price of, say, $40 to $60 a barrel, these businesses can generate higher returns on invested capital, and that that will translate into higher cash flow, which finds its way back to shareholders.'

Unquoted portfolio 'refined'

Barnett also shone some light on the funds' unquoted holdings. He inherited a long 'tail' of such stocks in the funds from Woodford, and the manager has reined in that exposure.

Unquoted stocks accounted for £303 million of the Income fund and £474 million of the High Income fund at the time of their latest annual reports, down from £541 million and £673 million respectively at the time Barnett took over the funds.

Their relative size in the portfolios has changed less markedly, given continued outflows after Woodford left Invesco. Unquoted stocks now make up 5.8% of the Income fund, down from 6.6%, and 4.6% of the High Income fund, down from 5%. 

By contrast, Woodford has been a more active unquoted investor, with unlisted stocks having grown to 9.5% of his Woodford Equity Income fund at the end of January, sparking concern from some over his weighting to early-stage companies.

'The exposure that I have to commercialisation businesses, unquoted businesses, has been refined over the last few years,' said Barnett.

'I own a number of stakes in what we could generalise as quoted venture capital companies, which are generally taking technology out of university laboratories and trying to commercialise that, which I think can be a very interesting and profitable investment exercise,' he added.

'The exposures that I’ve got today tend to be concentrated around those businesses that offer diversified exposure to a number of different technologies, so I’m not pinning my hopes on the outcome of one technology, one company, or one clinical trial.'

Analysis of the unquoted portion of the Income and High Income funds bears that out. 

In the Income fund, the roster of unquoted companies has shrunk, with some, such as intellectual property specialists Allied Minds (ALML) and waterless washing machine maker Xeros (XSG), floating on the stock market since Barnett took over the fund. Others were taken over, such as software company Kalibrate Technologies and aircraft leasing business Propius. And some, like attempted bank acquisition vehicle NBNK, fell by the wayside.

Only one new unquoted stock has been added, and has remained, in the portfolio since Barnett took over: Vedanta Biosciences, a spin-off of US healthcare company PureTech Health (PRTC), which the manager holds in both funds.

In the High Income fund, Barnett has proved more willing to add new unquoted holdings, but of the dozen fresh investments, 10 are spin-offs from companies he already holds.

Gelesis is another PureTech company, ABLS is from the Allied Minds stable, First Light Fusion, Genomics and Oxford Sciences Innovation have all been 'incubated' by IP Group (IPO) and Cell Medica, Plaxica and Veryan are spin-offs from Touchstone Innovations, which last year merged with IP.

Only Mereo Biopharma, which canned plans for a flotation last month, and Lamellar Biomedical do not have links to one of those four venture capital companies.

'Given my relationships with those businesses, I have the opportunity to invest in their spin outs, and selectively invest in the companies that they’re creating, which is what I’ve done to a certain extent over the last few years,' said Barnett.

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