31 October 2013
On 15 October 2013 Neil Woodford revealed that he will leave Invesco Perpetual after more than 25 years with the firm. Woodford is currently arguably the UK's best known fund manager. This article gives some background on Neil Woodford, his replacement Mark Barnett and on the two funds he is most well known for running – the Invesco Perpetual Income and the Invesco Perpetual High Income funds. NEIL WOODFORD
Woodford’s departure is a major blow for Invesco, in total he manages assets worth around £33 billion, nearly half of Invesco’s £70 billion assets under management (AUM). His flagship funds, the Invesco Perpetual Income and High Income funds, have AUMs of £10.6 billion and £14 billion (as at September 2013). Many investors invested in his funds because of Woodford’s style and record and it is expected his departure will lead to billions of pounds flowing out of Invesco to other funds and to Woodford’s new venture.
There are very few details about Woodford’s new fund management business but he has said that he will establish the business serving institutional and retail clients as soon as possible after 29 April 2014. Invesco state that no other personnel are expected to follow Woodford to his new venture and that in fact his colleagues are looking forward to emerging from Woodford’s shadow to step up and take on more responsibility. Time will tell whether this will be the case. Around 10% of Woodford’s funds are in less liquid stocks but performance is largely driven by more liquid, large stocks. Invesco have done a lot of work on the liquidity profile of the fund and have plans in place to cope with any outflows. Woodford will manage any outflows from the funds he manages up until his departure.
Woodford’s departure has been described as amicable and being a consummate professional we expect he’ll do his best to leave the funds in a good state and with a good track record. This was confirmed by his colleagues. As such we expect him to be fully engaged in managing the funds up until he departs at the end of April 2014. It should be pointed out though that he will be unable to add new stock names to the portfolio without Barnett’s approval.
Barnett will take on the majority of the £33 billion Woodford manages when he steps down in April including the Income and High Income funds. Mark Barnett is 43, 10 years Woodford’s junior, and has been at Invesco for 17 years having started his investment career at Mercury Asset Management four years before that. Mercury was later bought by BlackRock.
Barnett is similar to Woodford in many ways but he is no clone. He uses a similar contrarian value approach to Woodford – buying stocks when they are fundamentally cheap and holding them for the long term. For years Barnett has been groomed as Woodford’s successor and having worked with Woodford for 17 years there is likely to be a relatively smooth transition between the two managers. Barnett currently manages around £1.5 billion, much less than he’ll be taking on, so there will be a huge step up in responsibilities for him when he takes on Woodford’s assets.
We have recently met with Barnett and his colleagues at their head office in Henley on Thames and at an advisor’s event in London. Prior to Woodford’s announcement we’d attended group presentations by him too. Each time we’ve come away with a positive impression but we need to see how he manages a much larger amount of money than he has historically and how he handles any outflows as well.BARNETT vs WOODFORD
Their holdings are quite similar, six of the top ten stocks owned by Woodford’s High Income fund and Barnett’s Strategic Income are the same and each fund has its biggest weighting in pharmaceuticals – 33% for Woodford and 23% for Barnett. Outside of the top ten holdings only around 50% of the holdings in the portfolios are similar. Barnett has a much bigger slice of the financials sector and is also less of a fan of industrials than Woodford. Overall there is about a 55% commonality between the two.
Barnett has lagged Woodford in terms of performance over ten years but has beaten him over five years with his Strategic funds delivering an annualised 13.1% over five years to September against 11.4% from Woodford’s High Income. Barnett’s funds are much smaller than Woodford’s and so are easier to manoeuvre and part of his outperformance has been due to a higher exposure to mid-caps. Barnett has performed slightly less well in falling markets though. Barnett’s stock turnover, at 15-20%, is a little higher than Woodford’s.
The vast majority of investment peers and commentators that have made their views known in the press/newswires are recommending to “hold” or “suspend” the funds from panels. I.e. they are comfortable with investor’s money being in the funds but they are not recommending them for new money.OUR VIEW
Neil Woodford will continue to run the income funds until next April, with Barnett approving new names to the portfolio. Both continue to have the backing of a strong investment team at Invesco Perpetual. Mark Barnett is clearly a capable manager although it is yet to be proven whether he is of the same calibre as Woodford when managing larger amounts of money. He will be losing his mentor and the much larger funds he will manage will constrain him. Also we believe there will be large outflows from the funds that have the potential to negatively impact performance. These outflows will be sourced from the more liquid large cap names in the funds. This is sensible but will also result in a higher weight of the less liquid small cap and unquoted portion of the funds.
Mark Barnett is the most similar manager to Woodford out there. He’s worked with him for 17 years and sits next to him – no one is better placed to have learned how Woodford managed such large sums of money. There are many good funds in the UK Equity Income sector but no obvious similar replacement other than the funds offered by Invesco Perpetual. Investors should ensure they are sufficiently diversified and not overly exposed to one fund or asset class. We believe new investments should not be directed into the Invesco Perpetual Income and High Income funds currently but that there is no need for investors to rush and withdraw their money.DAN FURNEAUX, CFA
Fund Research Manager
Investment Management Research Unit (IMRU)