View the article online at http://citywire.co.uk/money/article/a731061
'Be vigilant': Mark Barnett answers investors' questions
The heir to Neil Woodford is worried about market valuations and the UK economy. But he's confident about his approach.
Mark Barnett, the heir to Neil Woodford on Invesco’s Income and High Income funds, as well as the Edinburgh investment trust, took questions from financial advisers anxious to find out what changes the fund manager was planning for the multi-billion pound portfolios.
The Citywire AA-rated fund manager already runs funds including Invesco Perpetual UK Strategic . But, financial advisers asked in a live webcast with Barnett, can he handle the huge amount of money he is taking on in April? Will he sell Woodford’s holdings? And where in the market does he think looks good value?
We sum up the financial world according to Barnett:
Q. How is the transition progressing?
As well as recruitment and getting to grips with a managerial role, Barnett said: ‘I’m looking at a selection of companies I hadn’t looked at before... particularly smaller ones.
‘I’m using time now to get more familiar with them as investment prospects.’
Q. How will you handle so much money?
‘My style has always been to see myself as a long-term investor,’ he said, emphasising that his average stock holding period is four to five years.
Barnett will be running more than £26 billion across his funds; at this point last year he oversaw less than £5 billion.
‘My approach and style and philosophy lends itself to larger sums of money… the honest answer is I haven’t done it before so I don’t know… my belief is that my process is scalable to larger amounts of money’
But he’ll have a team supporting him: ‘I’m not on my own.’
Q. How will you handle outflows?
Barnett said that current manager Woodford was handling any outflows from investors who would follow the fund manager elsewhere.
‘My stance would be to try to, very much in same way he has done, to try and effect changes, fund redemptions in a way that is unpredictable, as anonymous as possible... you don’t want the market to see you coming.
‘I can use redemptions to try and reshape the fund in a way I want to see it.’
Though he has ‘plans’, Barnett said he reserved the right to keep them secret for now.
Q. Do you put more emphasis on diversification (than Woodford)?
‘My funds have historically had holdings of around 60-80 which is sufficiently diversified’.
He said his top 10 holdings represented 40-50% of his portfolio.
‘My approach is fairly diversified in terms of total holdings, concentrated but not over concentrated.’
Q. Do you expect to make changes to your UK Strategic Income fund?
‘No’ was the short answer. After eight years running the fund, ‘it’s in shape I want it to be in’.
What about the Edinburgh trust? ‘The Edinburgh investment trust is going to fit into my stable of portfolios. The approach used for all my funds will be reflected in Edinburgh investment trust.
‘Over time I will be making changes to reflect some of the differences I want to emphasis versus what has been in there historically.’
But this will be evolutionary, not revolutionary.
Q. What is the outlook for the UK economy?
‘It is doing ok’, says Barnett, at least better than everyone thought 12 months ago.
‘But let’s not get carried away’.
‘The growth rate we saw yesterday is about as good as it’s going to get.’
He cited three reasons for his caution: a lack of credit growth and pressure on small business; weak wage growth; and a lack of business investment.
‘This isn’t a pin your ears back for a super-duper recovery situation.’
Q. When will interest rates rise?
Not for a while, Barnett suggested, after Bank of England governor Mark Carney stepped back from his 7% unemployment ‘waypoint’ for raising rates, and spoke about the ‘uneven recovery’.
‘He’s in no hurry to put interest rates up.’
‘I don’t think it will happen this year. We may start to see it early next year but even then it’s going to be gradual’, he said pointing to suggestions of incremental rate hikes of as little as 10 basis points.
Q. Is the UK share market fairly valued?
That’s a tough question, he answered.
‘We’ve had a very very strong run in the UK and other major equity markets and the bulk of the price moves has come as a result of… a rerating in price earnings multiples... Very little has come in earnings growth… so my hunch is we are looking on the expensive side of fair value'.
The relative attractiveness of equities over bonds ‘is much much narrower now than has been over the past few years. So the relative attractiveness argument is a lot less strong than it was 12 months ago.’
He provided a warning: ‘I do see pockets of value, but you need to be much more vigilant.’
‘Be sure you have a strong absolute valuation argument for shares you’re are buying… not just saying it looks good value compared to bonds or cash.’
He said investors must tread carefully, as ‘valuations have risen to levels where if there isn’t earnings growth there will be price vulnerability.
‘There is scope to lose money in this market if you don’t have earnings growth.’
Q. Will small company shares continue to outperform blue chips?
No. ‘As an overall view I don’t think we’ll continue to see mid-caps forging ahead relative to the FTSE 100.’
‘Maybe what we can expect from equity market this year is a lot lower return overall. You certainly shouldn’t be gauging expectations on what we’ve seen in the last two years’.
This year’s returns will be ‘more modest’.
Q. Will income stocks lose their attraction as government bond yields rise?
Holders of shares with bond-like characteristics – so-called 'bond proxies' like ‘utilities in particular’ – may wonder if these dividend payers will suffer in the short term as gilt yields become more appealing.
But ‘unfortunately that argument doesn’t work in the long term’. Stay with decent companies that grow sustainable yields over the long term, Barnett argued.
Q. What is your opinion on pharmaceutical and tobacco stocks?
Barnett holds shares in both sectors, both in the UK and elsewhere. ‘In many respects companies like Roche and Novartis are better businesses than their UK counterparts, albeit more highly rated’.
The sector ‘remains interesting... the big picture is still a positive one.’
Barnett pointed to relaxed US regulatory requirements, as well as products based on a switch from chemical research to biological research. What’s more, ‘personalised medicine is going to be a big feature going forward… that plays into hands of drugs companies.’
‘The stock market has started to re-rate them…I would say this is a combo that still looks attractive’
And tobacco stocks?
I’m still very happy with the tobacco sector notwithstanding the noise and mud flung at the sector.’
‘I don’t think necessarily the overall picture is necessarily more negative than this time last year. Valuations are certainly a lot lower than last year.’
The attractiveness of the stocks remains unchanged: strong cash generation, management interest aligned with shareholders and cash returns to shareholders.
‘I have been increasing and would be interested to increase [my holdings of tobacco stocks] in the funds.’
Q. What about banks?
Barnett holds lots of financial stocks, but not banks. ‘The bank sector remains challenged, notwithstanding everything they tell us about problems being behind us.
Though banks are ‘working hard on costs and to a certain extent have improved earnings, ‘if they’re not growing the top line then it’s going to be difficult to continue to grow earnings.’
Impairments could continue to rise and regulation will get stricter.
‘Much of my financial interest has been in the non-life insurance sector.’
Barnett points to holdings in mid cap stocks Hiscox, Beazley and Lancashire.
As well as being diversified away from the banks, ‘they are extremely well managed and offer quite attractive returns on equity.’
Barnett also pointed to positions in Provident Financial, London Stock Exchange and Legal & General.
Q. Do you invest in unlisted stocks?
Barnett has a smaller number of unlisted shares in his portfolio than Woodford does.
Some of these are spin-offs from university research. They are ‘well off the beaten track for most investors’, and while some will fail, ‘returns could be quite substantial in ones that turn out well’.
Q. What makes a good fund manager?
‘You have to be patient.’
‘You have to take a long-term view.
‘You have to imagine yourself as if you’re buying not just a share in a business, but the whole business. ..you have to see dialogues with management as if it was a private company.
‘And not get bumped around by what the market is telling you on a day-to-day or hour-to-hour view… that’s the biggest challenge for a fund manager, trying to cut out the noise’.
‘Stick to your knitting.’
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