Invesco Perpetual Income and High Income - fund updates

Heather Ferguson | Mon 12 December 2016

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• Mark Barnett is cautious in his outlook and expects UK companies to struggle through a challenging operating environment over the medium term
• Performance has been good since he assumed his position at the helm of Invesco Perpetual’s Income and High Income funds two and a half years ago
• A bias to healthcare, tobacco and outsourcing businesses remain as this is where the manager is currently finding value

Manager’s outlook

Mark Barnett is cautious in his outlook and expects UK companies to struggle through a challenging operating environment over the medium term. He expects a period of low inflation to stunt the ability of companies to increase prices. Elsewhere, he is wary of the political shift towards protectionism, which he feels poses a threat to equity markets. He therefore aims to invest in companies he is confident can perform well despite the wider economic environment.

Fund Updates

• The manager remains positive in his outlook for healthcare companies as their performance tends to be removed from the strength of the economy. Investment in this area forms a significant portion of the portfolios and he has focused on businesses investing heavily in research and development. Businesses with innovative drugs have greater pricing power, in his view.
• Investor demand for high quality companies with predictable and reliable earnings has driven the share prices of such businesses to unstainable levels. However, there is still value to be found among tobacco and outsourcing businesses, which are exceptions to the rule, in the manager’s view. The funds' tobacco investments are in well-run companies with unrivalled pricing power, and the manager feels their potential has been overlooked by other investors. He believes outsourcing businesses, such as Compass Group, should benefit from other businesses looking to cut costs.
• Exposure to real estate businesses has increased over Mark Barnett’s tenure. He has focused on those that supply properties to long-term, preferably government-backed tenants, such as GP surgeries. These companies benefit from secure leases and a government drive to ease pressure on hospitals by directing patients to their GPs where possible.
• Following the UK’s decision to leave the European Union sterling weakened dramatically, which led investors to favour companies with substantial overseas earnings. The manager took this as an opportunity to take profits and reduce the funds' exposure to these businesses as he felt prices had been driven to unsustainable levels.

Performance

Both the Invesco Perpetual Income and High Income funds have produced good returns over Mark Barnett’s tenure, returning 13.1% and 15.2% respectively, compared with 11%* for the average fund in the sector**. Past performance is not a guide to future returns. The High Income Fund currently yields 3.05% and the Income fund currently produces a yield of 3.17%; alhought yields are not a reliable indicator of future income and the fund takes charges from capital, which boosts the income but can erode the capital value.

The funds have lagged the peer group since January this year as oil and mining companies, which are underrepresented in the portfolios, performed well. The funds also experienced a number of stock specific issues. For example, easyJet’s share price fell following the UK’s decision to leave the European Union, detracting from the funds’ performance. However, as the manager retains his conviction in the company, he took the opportunity to top up the position at a reduced price.

Past performance is not a guide to the future.

Source: Lipper IM * to 30/11/16

**While the funds are officially in the IA UK All Companies sector, we view them as UK Equity Income funds and have analysed performance against this peer group.

Our view

Mark Barnett has built a good long-term track record managing UK income-focussed funds. Our analysis suggests longer term returns have been led by the positioning of his funds towards the best performing sectors of the stock market.

Mark Barnett’s focus on firms with strong balance sheets, resilient earnings and the potential to increase dividend payments is a sensible approach. We believe Mark Barnett will do a good job managing the Invesco Perpetual Income and High Income funds, however, we currently feel there are superior alternatives for investors seeking a UK equity income fund. The funds are therefore not currently being considered for inclusion on the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.