Mark Barnett of Invesco Perpetual is in high demand. As a manager of three open-ended funds, four investment trusts, and a number of other mandates, he is a busy man.
Following Neil Woodford’s departure, Barnett took over management of Invesco Perpetual’s flagship income funds. Some may have viewed this as a poisoned chalice. However, with 23 years’ experience in the industry and strong performance in his own right, Barnett is not a man to be intimidated. I recently caught up with him at Invesco Perpetual’s Henley office.
Not one to let the grass grow under his feet, he has spent the past 18 months reshaping the Invesco Perpetual Income and High Income funds to suit his own style of investment. Many managers hang onto a predecessor’s portfolio far too long, in my view. This often causes great problems in the future so I am glad to see Barnett has made these funds his own.
The funds were historically concentrated around the top 10 holdings. Barnett has increased diversification within the funds by reducing this concentration from between 55 per cent and 60 per cent to around 40 per cent.
The pharmaceutical sector, a large portion of the funds under Woodford, witnessed the biggest reductions. The fund’s position in GlaxoSmithKline was sold and AstraZeneca was reduced from around 10 per cent to nearer 4.5 per cent. As exposure to healthcare was reduced, the manager increased the proportion invested in financial companies. Legal & General is a new addition to the portfolio and he has added to Provident Financial.
The funds have very little exposure to banks but Barnett has been eyeing potential dividends from the sector. Banks have reduced risk, hold significantly more capital, and are more tightly regulated than they were prior to the financial crisis. Provided capital requirements are not increased further many banks, particularly Royal Bank of Scotland, will soon be in a position to return surplus cash to shareholders, according to the manager.
Elsewhere, Barnett has initiated a position in BP. He believes the oil giant has transformed itself since the Deepwater Horizon disaster in the Gulf of Mexico. Ironically, this costly event gave the company a headstart in cutting costs. It forced them to recognise their suppliers made large profits from the booming oil price while taking on little of the risk.
They have since negotiated better fee structures which means they are now in an excellent position for the future, in the manager’s view. The recent collapse in the oil price negatively affected BP’s share price and it now yields 7.25 per cent. While many analysts are cautious on its sustainability, Barnett is confident the firm’s cost reductions will allow the dividend to be maintained.
“Oil is for running the economy, miners are to build one”, in his view. While oil will always be in steady demand, the requirement for raw materials is more closely linked to global growth. Although mining firms have been reducing their capital expenditure, the manager feels dividends in the sector are under threat from the slowing growth in China and the funds currently have no exposure to this area.
Like his predecessor, Barnett mainly focuses on firms with sustainable dividends. He is cautious on his outlook for the UK economy and expects many companies will be forced to cut dividends by the end of 2016. He therefore seeks companies with lower yields which he believes are able to grow dividends over time. This includes companies such as AA, which does not currently pay a dividend, and Card Factory which yields 1.82 per cent.
This is a sensible approach and is where the Investment Association pathology on dividends is flawed (both funds were removed from the IA UK Equity Income sector as they had failed to meet the yield requirement of 110 per cent of that produced by the FTSE All Share Index).
Anyone can generate a portfolio of companies with high dividend yields. However, Barnett’s focus on firms with strong balance sheets, resilient earnings and the ability to increase dividend payments is much more likely to provide superior returns over the long term.
Mark Dampier is head of research at Hargreaves Lansdown.