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How a Mark Barnett fund became a £2bn small cap giant

2 Comments
How a Mark Barnett fund became a £2bn small cap giant

If you carved out the sub-£2 billion market cap holdings in Mark Barnett’s Invesco Perpetual Income fund into a standalone portfolio, it would be the largest smaller companies strategy in the UK.

Detailed datasheets seen by Wealth Manager chart the rise of the small cap portion of the fund, following previous manager Neil Woodford’s departure back in March 2014.

The historic data also reveals just how much the shape of the portfolio has changed over the years. Although it is well known that the fund has been experiencing a protracted period of outflows and has traditionally had significant exposure to small caps, the extent of both now might surprise some long-term investors who do not scrutinise its monthly factsheets.

From a peak of £10.78 billion in July 2013, the fund had more than halved in size down to £5.02 billion by the end of November 2017, and it saw further new outflows of over £500 million last year.

When Woodford left the company in March 2014, the fund was £8.3 billion in size. It had 129 holdings, with 21.81% in small caps (defined as sub-£2 billion by market cap) and 63.5% in large and mega-caps (with a market cap of over £10 billion).

In an interview with Citywire back in March 2015, one year after he had taken the reins, Barnett (pictured) said he wanted to reduce both the concentration of the fund’s top 10 holdings and the size of its tail, arguing many of its small positions did not justify the time needed to monitor them.

‘The number of stocks I inherited in the tail was probably a bit too large and to keep close to that number of companies is difficult,’ he said.

‘I have come to the conclusion after running the funds for more than a year that there are names in the tail I no longer want to commit to. The trade off with these companies is time allocated to them versus amount invested. This is not in my favour and it takes a lot more time out of my week.’

When Barnett took on the fund in March 2014, the top 10 positions comprised 56.06% of the portfolio, but he had reduced this to 38.54% by March 2015, and 33.95% by November 2017.

At the same time, the percentage of the fund held in large and mega caps almost halved from 63.5% to 33.21%.

Jane Bland, head of public relations at Invesco Perpetual, said this reflected the disposal of a holding in GlaxoSmithKline and the reduction of the fund’s positions in AstraZeneca and Roche, plus an increase in mid cap and smaller stocks.

‘Despite the sales of the major pharma stocks, the mega cap (and highly liquid) holdings exposure has moved only from 22.3% to 17.6% over the period,’ she noted.

However, Barnett was less successful in chopping the fund’s tail, with the number of holdings constant at 129 in March 2015, and still at 123 in November 2017. At the same time, the small cap portion of the fund has now almost doubled to 42.2% (see chart one here) .

While the bulk of this exposure, some 26.39% of the fund’s total assets, is in the more liquid £500 million to £2 billion market cap range, it also has 2.1%, equivalent to £105.3 million, in companies with a market cap of £49 million or lower (see chart two here).

Bland said this does not raise liquidity concerns for the company, however.

‘Our dealers have confirmed that there is little difference in the liquidity of holdings below the top tier of the FTSE 100 index and those in much of the 250 index. Therefore redemptions can be funded from across the market,’ she said. 

‘The AIM index has seen an increasing number of quality mid cap companies quoted on it as it has gained credibility.’   

Performance

Ostensibly, the high exposure to small caps might have been expected to provide a kicker to returns, given the area’s relative outperformance against the FTSE 100 over the last five years. But this does not appear to have been the case. Over three years to 12 January, Invesco Perpetual Income is up 18.1% compared to the sector average return of 34.9%, and over five years it has delivered 61.5% versus 65.1% (see chart three here).

Part of this underperformance has come over the last year, with the fund returning 4.7% versus the peer group’s 13.2%, after it was hit by a number of stock specific issues, such as the blow up at top 10 holding Provident Financial and heavy sell-offs in other big positions, including Capita and BT.

In an interview with Citywire back in November 2017, Barnett described the last year as ‘very frustrating’, but noted that many of his holdings have delivered, and he continues to see attractive income opportunities in housebuilders, tobacco and oil names.

And in his latest outlook piece, Barnett, who also runs the £10.2 billion Invesco Perpetual High Income fund, said: ‘Looking ahead, I will be proceeding cautiously, employing a well-tested investment process, based on fundamental company analysis and a prudent approach to valuation.

‘The UK market continues to present the long-term investor with opportunities for profitable investment, in companies with the potential to deliver a sustainable flow of dividend income in the event of more volatile market conditions.’  

The wealth manager’s view

Gavin Haynes, managing director, Whitechurch Securities

It is interesting to see the changing fund composition and this highlights how important it is to look under the bonnet and have a good understanding of the underlying holdings when assessing the risk of a fund. Traditionally this fund would have been viewed as a defensive blue chip focused fund, but now having over 40% in smaller companies it has to be treated as a multi cap fund and risk rated accordingly. We do not hold the fund, but the Woodford Equity Income fund has been one of our core holdings since launch. This fund also has a material amount in smaller companies (around 35% of the portfolio in small caps, AIM stocks and unquoted combined) and this is taken into account when we are risk rating the fund. In fact, as part of a de-risking of some of our portfolios, we recently made the decision to switch out of this fund for more cautious mandates and moved into the sister Income Focus fund which is primarily focused on large and mid cap plain vanilla dividend stocks.

Citywire comment

Frank Talbot, head of investment research

With this being an all companies fund, Barnett is well within his rights to invest the portfolio’s assets in smaller companies. While most of the assets are in the most liquid small caps, the scale of the investment will take many by surprise. Small caps have done very well in recent years, but that has not translated into outperformance for the portfolio – which will be frustrating for the manager and investors.

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