Mark Barnett, manager of Invesco Perpetual’s giant UK equity income funds, has played down the threat to investors from a minority Conservative government although he described the UK’s post-election politics as ‘a bit of a mess’.
Commenting on the fallout from a hung parliament, Barnett expressed doubt about whether the Tories could stitch together a durable deal with the Democratic Unionist Party (DUP) and avoid another election.
‘I don’t think they want to go for another election because I think they see from the results of this election that the momentum is with the Labour party at the moment,’ Barnett said in a video interview on Invesco Perpetual’s website.
End to austerity
Barnett, manager of Invesco Perpetual’s £5.8 billion Income and £11.6 billion High Income funds, agreed with the consensus view that the government’s precarious position in the House of Commons would lead to a ‘softer’ Brexit and a more ‘consensual’ and ‘cross-party approach’ to policy making.
This in turn would mean an end to austerity and spending cuts and ‘that we are going to see a lot more fiscal loosening in the next year or two’, he said.
This led Barnett to take a positive view on prospects for the economy and the UK stock market. Echoing the optimism of fund manager Neil Woodford (pictured), his former boss and now rival, Barnett believed that despite the short-term political challenges and the squeeze on consumer spending from the weak pound, the economic backdrop was ‘more supportive in the medium term’.
With the pound 18% lower than two years ago, Barnett said the bad news was priced in and sterling was unlikely to fall much further.
‘I think short-term inflation has picked up in the UK and that’s largely been driven by the depreciation of sterling. So you have seen a squeezing on wage growth because of that, but that I think is going to work its way through over the course of this year and although consumer spending in the short term may be coming under some pressure I don’t necessarily see that continuing for the full course of this year into next year.
‘In fact I would say the outlook for the economy hasn’t materially changed. And if anything at the margin I would say there are some positives to come out of all of this,’ Barnett said.
Buy undervalued domestics
Barnett, Invesco’s head of UK equities, reiterated his view that the best opportunities in the UK stock market were in domestic stocks that had been aggressively sold off after the EU referendum.
‘The stock market has re-rated quite a lot of the international businesses over the last nine to 12 months and actually the pockets of undervaluation which remain in the UK market have predominantly been around the domestic focused businesses,’ he said.
‘And that’s for choice where I’ve been trying to shift the portfolios,’ adding: ‘I’m happy with how I am positioned currently.’
Although far from alone in this opinion, Barnett has a lot at stake given the scrutiny he is under having succeeded Woodford on the income funds three years ago. The post-Brexit period has been difficult for Barnett who this month lost a long-held Citywire rating for his three-year performance of his funds.
He held a top Citywire AAA rating for all of 2015 but slipped down our ratings table in the following 18 months as the more defensive income stocks he and other equity income managers hold came under pressure. Woodford has also been under pressure, although he retains the lowest Citywire + rating. (Read: guide to how our fund manager ratings work.)
Nevertheless, Barnett's funds have not done badly. Although they rank higher over 10 years when both Woodford and Barnett were involved. over three years to the end of May Invesco Perpetual Income ranks half way down the list of 96 UK Equity Income funds with a total return of 25.4%. The High Income fund has done better under Barnett, ranked 36th with a 27.8% total return.
There has been a similar story on the Edinburgh (EDIN) and Perpetual Income & Growth (PLI) investment trusts Barnett runs, both of whose three-year performances have dipped, leaving their share prices on wider than normal discounts to net asset value.
Perpetual Income has suffered more, due to its bigger holdings in smaller and medium-sized companies, generating a total shareholder return of 18% in the thirty-six months to yesterday, below the 26% from the FTSE All-Share.