Has Woodford’s ‘son’ fallen into the same traps?
WHAT NEIL WOODFORD HAS KEPT IN FEES CHARGED SINCE HIS EQUITY INCOME FUND WAS FROZEN
THE destructive tentacles of disgraced fund manager Neil Woodford continue to weave their way through the investment management industry like a gory scene from sci-fi horror film Alien.
Having brought down his own investment empire – Woodford Investment Management – and in the process reduced tens of thousands of investors’ fund holdings to rubble, the 59-year-old fund manager is now in danger of truncating the career of Mark Barnett, his former protege at Henley-on-Thames asset manager Invesco.
Unless Barnett can quickly turn around the fortunes of the multi-billion pound Invesco investment funds he inherited from Woodford in early 2014, he could well be the latest victim of the debacle that has already seen flagship fund Woodford Equity Income dismembered; investment trust Patient Capital handed over to Schroders to manage; and dealings in Woodford Income Focus suspended.
Earlier this month, Barnett – dubbed ‘Son of Woodford’ by experts – and Invesco were dealt a knee-buckling blow when fund ratings agency Morningstar downgraded both Invesco Income and Invesco High Income amid concerns about their exposure to smaller companies – and in particular illiquid stocks. These are the two biggest funds Barnett manages for Invesco.
‘Barnett’s continued intent on investing in smaller names gives us cause for concern,’ said Morningstar analyst Peter Brunt. Chillingly, as far as Invesco investors are concerned, it was these very same issues which sparked the beginning of the end for Woodford.
Given Morningstar’s importance as an assessor of investment funds – downgrades normally trigger a wave of selling – Invesco’s response was swift. It rushed out an article from Barnett insisting his funds were ‘appropriately positioned, well diversified and able to generate liquidity should investors wish to buy or sell’. He also referred to the oversight of his funds by other departments within Invesco.
Yet a number of experts are drawing parallels between what has happened at Woodford and what is unfurling at Invesco – namely, a lethal cocktail of poor investment performance, illiquid investments and a flood of investor redemptions. In Woodford’s case, this potent mixture led to the June suspension of flagship fund Equity Income – and its winding up.
Although no one has yet gone as far as suggesting a similar fate (winding-up) for Invesco Income and High Income, at the very least Barnett’s future as Invesco’s head of UK equities seems on the line.
‘Will Barnett always be tarred with the Woodford brush?’ Wealth asked one leading investment analyst late last week. ‘Yes,’ came back the curt response. ‘How can he set himself and the way he manages money apart from Woodford?’ ... ‘Too late.’
‘Do you have confidence in Invesco as a manager of UK income assets?’ ... ‘There are plenty of other funds out there,’ came back the tart response. Hardly a ringing endorsement for an individual who has spent 23 years at Invesco – 18 under Woodford’s wing. Brian Dennehy, managing director of investment scrutineer FundExpert, was equally emphatic. ‘Barnett’s reputation will always be haunted by Woodford.’ In October 2013, when Woodford said he was quitting Invesco to set up his own investment business – leaving Barnett to pick up the reins of the Invesco funds he had run – Dennehy advised anyone in Invesco Income and High Income to sell up.
He just did not think Barnett could seamlessly slip into the shoes of the ‘£30 billion man’ – the amount of money Woodford had run at Invesco prior to leaving. Late last week, Dennehy sent an urgent message to clients warning them that some Invesco funds run by Barnett ‘ may suffer outflows leading to fund closures for a period’.
He ‘suggested’ clients should sell holdings i n Income and High
Income – as well as two other smaller funds run by Barnett (Invesco UK Equity Income and UK Strategic Income). All rather dramatic. All rather scary.
While Barnett fundamentally disagrees – see left – with Morningstar’s decision to downgrade his two big funds, performance statistics do not lie. And whichever way you look at the numbers for Invesco Income and Invesco High Income under Barnett’s reign, they make for uncomfortable reading.
Since March 2014, when Barnett assumed control of the two funds, they have woefully underperformed both relevant stock market benchmarks and most competing funds.
Overall returns for Invesco Income and Invesco High Income of 16 and 17 per cent respectively (slightly lower in the case of other share classes held by fund investors) compare with 39 per cent from the FTSE All-Share Index – and 33 per cent from the ‘average’ rival fund. Over the last two 12-month periods, both funds have lost investors money. Over the last three years overall, the two funds have also lost money for investors, against a backdrop of continued investor redemptions, causing the funds to shrink in size alarmingly. In the case of Invesco High Income, it has shrunk by more than half under Barnett’s stewardship – from
£13.1 billion to £6.1 billion. Sister fund Invesco Income has reduced by more than two thirds – from £8.3 billion to £2.7 billion. Initially, the haemorrhaging was a result of money moving to
Woodford. Recently, political uncertainty has played its part as investors have pulled money out of most UK funds. But poor performance has played a big part. Although Barnett has attempted to stamp his own mark on Invesco Income and Invesco High Income, he has failed t o put sufficient cl ear water between himself and his mentor. Yes, there are extenuating circumstances. Like Woodford, Barnett is a ‘value’ investor which means he has always sought out the same undervalued UK stocks Woodford liked. Such companies – mainly domestically focused – have been hit by the Brexit ‘factor’ and the weakness of sterling.
SUCH holdings could wel l b o u n c e b a c k spectacularly if a Conservative government is elected next month. Also, changing inherited portfolios is a massive undertaking – and Barnett was keen to stress in his article last week the fact that the overlap between his funds and that of Woodford Equity Income at the time of the latter’s suspension in June was ‘less than 15 per cent’. But – and there is a big BUT – the fact remains Barnett’s funds have the same fault lines as Woodford’s did. Namely, key stakes in illiquid stocks that would prove extremely difficult to sell if sustained investor redemptions forced Barnett to do so. Then, Invesco would have no choice but to do a ‘Woodford’ and suspend dealings. Last week, at the request of Wealth, a respected City analyst looked at liquidity of all the holdings – as at the end of September – in Invesco Income. He divided them into ‘buckets’ according to how quickly they could be sold in normal conditions. His analysis indicates that 71 of the 99 holdings would take more than 30 days to liquidate – with 44 taking longer than 90 days. The 71 – a number of them unquoted stocks – represent 54.7 per cent of the fund’s assets. These figures are i mportant because when the City regulator wrote in June to the Treasury Select Committee after dealings in Woodford Equity Income were suspended, it provided similar data on the Woodford fund. It said that just before suspension (end of April), Equity Income had 65 per cent of its assets in companies where its shareholdings would take more than 30 days to liquidate. In other words, Invesco Income is entering similarly dangerous territory although in its defence it still has nearly 25 per cent of its assets in shares that could be sold within seven days – the likes of BP, British American Tobacco, Tesco and Shell. On Friday, the analyst said there was ‘cause for concern’ over the liquidity of holdings in Invesco Income and High Income. He refused to comment further other than to say that ‘selling large concentrated stakes in smaller compani es could l ead to a f urt her deterioration in the performance of Barnett’s key funds’. So, we’ve just watched the investment industry’s version of Alien. Are we about to endure the sequel Aliens?