Invesco’s head of UK equities Mark Barnett has defended positioning in his two flagship income funds after unfavourable comparisons with Neil Woodford’s offering.
The suspension of LF Woodford Equity Income over liquidity issues and the winding down of the fund had led to questions over Barnett’s Invesco Income and Invesco High Income funds, previously managed by Neil Woodford.
Barnett, who worked closely with Woodford on the funds prior to his departure from Invesco, said comparisons were inevitable but he managed the income strategies differently.
“Under my stewardship, the funds have chartered a very different course and it cannot be overstated that the portfolios I manage are very different,” he said. 
At the time the LF Woodford Equity Income fund was suspended, overlap with Barnett’s portfolios was less than 15 per cent.
“To non-investment professionals, this figure may sound high. It is not. For two UK equity income portfolios, this figure is very low,” the manager said.
“I would venture that any two diversified UK equity income portfolios in the market today would very probably have comparable crossover.”
Barnett (pictured) said he fundamentally disagreed with criticism surrounding the exposure to mid-, small- and micro-cap stocks and the liquidity in the Invesco Income and Invesco High Income funds.
“As a portfolio manager, my sole purpose is to deliver on the objectives of the funds under my management,” he said.
“For these funds, I aim to provide investors with both capital appreciation and growth in income over time.
“Over the past few years, the performance of the funds has been disappointing in capital appreciation terms and I regret some of the stock-specific challenges.”
Invesco Income has made a loss of 0.67 per cent over the past three years while the Invesco High Income fund is down by 1.76 per cent, as the below chart shows.
Performance of funds over 3yrs
Source: FE Analytics
Barnett said his belief that selective domestic equities offer better risk-adjusted value than many highly rated international names has affected relative returns.
“This positioning will, I believe, prove correct in time,” he explained. “But whilst the funds have lagged the wider market, I am proud that income generation remains strong.
“The income offered in my portfolios is better diversified, better covered and offers better growth than the UK equity market.”
The Invesco manager said concerns around the future were unfounded, noting that liquidity in the portfolios was strong and had proven very manageable.
In addition, Barnett said that exposure to less liquid unlisted companies had also been reduced since he took over from Woodford.
“One area of the portfolio that understandably draws attention is investment in unquoted companies,” he said. “Since I took over management of the portfolios some five years ago, I have materially changed the way we invest in unquoted companies and reduced the exposure of the funds to such investments.
“I have reduced the total exposure to unquoted investments across all of my funds from £994m to £493m.
“The capital released has either been used to fund redemptions or reinvested elsewhere in the portfolio to generate future growth. Today, unquoted investments account for just circa 5 per cent of total assets.”
Barnett said that while concerns have been raised by his exposure to small- and mid-cap holdings, there were also risks in concentrating the portfolio in large-cap names, “which could prove destructive to long-term performance”.
“Take the FTSE All Share as an example,” he said. “Of the 100 largest companies listed on the London Stock Exchange, 54 per cent of the dividend income is generated by the top 10 companies. The concentration risk here is clear: this year we have already seen several examples of dividend cuts.”
However, Barnett said his funds offered income that is better diversified than the FTSE All Share.
“In short, by diversifying across the market-cap spectrum, my funds offer investors better quality income – so better dividend cover – that is better diversified and growing more quickly,” he added.
As such, the investment case for the UK equities that Barnett favours remains unchanged.
Noting the outperformance of internationally diversified UK-listed companies with substantial overseas earnings since the EU referendum, Barnett said domestic facing stocks have undergone a sustained de-rating.
“Valuations across global equity markets have reached such an extreme level that £1 of revenues sourced in the UK is now worth less than a third of $1 of revenues sourced in the US,” he said. “This fundamental mispricing is due to the current pessimism felt towards the UK economy.
“As a long-term investor, I am looking for the long-term opportunity and have therefore maintained the domestic exposure of the portfolios.”
There have been signs that the UK equity market has begun to shift more recently as the prospect of a ‘no deal’ Brexit has receded.
“This prompted a marked change in the composition of the stock and sector leadership within the FTSE All Share index, which favoured the positioning of my portfolios and points to the very real opportunity that I believe awaits us,” Barnett continued.
“It remains my conviction that the level of pessimism discounted in current public equity market valuations is not sustainable.”
Barnett concluded: “For those who remain in doubt, I pose this question: ‘Where is the absolute risk for UK equity investors today?’
“I do not believe it lies in domestically orientated equities, which are trading at historic discounts, whilst offering sustainable growth in income at very attractive yields."
He added: “I believe this is the essence of active investing: positioning my clients to receive a better and more sustainable flow of income than they could get by investing in the market as a whole.”
Performance of funds under manager
Source: FE Analytics
Since Barnett took control of the funds from Woodford in March 2014, Invesco High Income has made a 15.99 per cent total return while Invesco Income is up by 15.1 per cent.