Invesco Perpetual Fund Downgrades: What the Analysts Say

Last month, we completed our review of our Morningstar Analyst Ratings for the Invesco Perpetual funds formerly under Woodford’s management. When Invesco Perpetual announced Woodford’s pending departure, we placed the funds under his management Under Review while we considered the consequences for investors under new manager Mark Barnett. Subsequently we have announced new Ratings for the Invesco Perpetual Income and High Income funds, with both funds moving from Gold to Neutral Morningstar Analyst Ratings, and the Edinburgh Investment Trust (EDIN), moving from a Gold Analyst Rating to Bronze.

In March 2014, Barnett was appointed manager of the two IP flagship funds IP Income and IP High Income, which together have AUM of some £20 billion. This followed his appointment in January 2014 as manager for the Edinburgh Investment Trust, with its £1.3 billion in assets under management. He has also taken over three segregated mandates from Woodford. 

These mandates are in addition to Barnett’s existing responsibilities as manager of three investment trusts and one open-end fund: Keystone Investment Trust (KIT), Perpetual Income & Growth (PLI), Invesco Perpetual Select UK Equity and the IP UK Strategic Income fund. Collectively these funds account for around £1 billion in assets.

In total, Barnett now manages seven funds, totalling approximately £22 billion in assets under management. Other than Woodford, no other fund manager in the UK has previously managed this scale of assets.

As with Woodford’s resignation, any resignation of a fund manager prompts a review of their replacement. There are a handful of teams where the management of a fund is genuinely a team process and the impact of one person is less pronounced—the Aberdeen Asian team and First State Emerging Markets team are two such examples—but the majority of successful funds are run by very smart individuals.

However, the departure of a star manager doesn’t automatically spell disaster. The reality is that behind the scenes, there is a process in place to ensure that business continues. Yes, Woodford was the face of IP Income until early 2014, but throughout his career at IP he was surrounded by other talented individuals who share the same investment ethos and who are equally well versed in how to analyse a company.

We also hold in high regard IP’s Paul Causer and Paul Read, who manage a hefty amount in fixed-income assets. The Global Equity, Asian and UK Smaller Companies books of business are also of a decent size and we hold a number of their fund managers in high regard—as demonstrated through our Analyst Ratings.

Every business faces risks, and it’s a sign of their strength—or otherwise—when they have to deal with a major departure. Investors in funds run by star managers must be cognisant of these risks, but they shouldn’t be an automatic deterrent that stops them from investing in these funds. When Woodford started out at Perpetual he was relatively unknown; those who stayed away for fear of his departure one day would have missed out on more than 13% of annualised returns since 1990, compared with the FTSE All Share’s 9%.

What’s more, Barnett himself is no stranger to UK equity investing as he brings a track record at Perpetual Income & Growth since 1996, where he has produced annualised gains of more than 11%.

However, our high regard for Barnett has not prevented a Ratings downgrade, so what’s behind that?

Scale of Assets

We can’t ignore the fact that Barnett’s workload has increased considerably. Not only have the assets under his management shot up, from around £1 billion to more than £20 billion, but he has three further funds to add to his stable, including another investment trust with a highly-demanding board of directors. That adds to the three existing trusts under his management, along with the IP UK Strategic Income fund. While Woodford had the benefit of accumulating this scale of assets over many years, for Barnett it happened overnight.

For this reason, we have also downgraded Barnett’s Keystone Investment Trust from a Silver Rating to a Bronze, and Perpetual Income & Growth Investment Trust from a Gold Rating to a Bronze.

Furthermore, Barnett’s success to date has been in the management of large and mid-cap UK equity income funds and it’s not yet clear whether he will be able to replicate that same level of success with a much larger asset base. Additionally, Woodford was known for his strong macro views and resultant portfolio positioning and he kept turnover at the funds fairly low. So since taking over funds, Barnett has had his work cut out for him in trying to reshape such giant portfolios into the shape that he wants them, never mind the challenge of other market participants trying to second-guess his every move.

Team Changes

Following Woodford out of Invesco Perpetual were two experienced analysts. Barnett has moved swiftly to replace this lost headcount from his team, but any personnel change means a change in that team’s dynamic and it will take time for this to bed down. Barnett has also hired two product directors to help with the increased client serving requirements that he faces, given the additional number of mandates he now runs. Again, this will take time to settle fully into place, although we acknowledge the experience of the new hires. 

In summary, we have considerable confidence in Barnett; he is doing his level-best to ensure business as usual at his funds and to apply his investment process across all his mandates. That’s why we can take some comfort that the investment trusts already under his grasp should continue to be sound investments for their shareholders and hence we continue to back him through our positive ratings. But the onus is on Invesco to give Barnett all the support he needs—and more—to run such giant funds in such a way that he can’t be second-guessed and that’s a tough ask.

This article was co-authored by Ruli Viljoen, head of Investment Research