Invesco Income and High Income – portfolio update
Dominic Rowles | Mon 18 November 2019
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- Mark Barnett's an experienced income investor
- A focus on companies sensitive to the UK economy held back returns in recent years
- The funds invest in unquoted companies but Barnett hasn't bought a new unquoted stock in two years
Our view
The Invesco Income and High Income funds are run in a very similar way and have a high level of overlap in the underlying investments.
Both funds are managed by Mark Barnett, a manager with more than two decades of experience in equity income investing. He focuses on unloved, but financially strong companies and tries to invest when their share prices and valuations are low. Then he waits patiently for the business to improve or the sector to return to favour.
He thinks the outlook for the UK economy is better than many believe, and that companies earning most of their money in the UK have been overlooked by other investors. He's therefore focused the funds towards these companies. But many of them remain severely out of favour. If sentiment changes, performance could improve, although there are no guarantees.
The funds aren't currently on the Wealth 50 as the list is focused on other excellent income funds.
Big opportunities in smaller companies?
Barnett thinks some of the UK's largest companies have become too popular with investors, and it's pushed their share prices to unsustainably high levels. If they fail to meet investors' high expectations, their share prices could fall significantly.
On the other hand, small and medium-sized companies, which tend to make more of their money in the UK, have been shunned because of concerns about Brexit and other political uncertainty. He's therefore focused the funds towards this area of the market. A small portion of the funds also invest in unquoted companies (those not yet listed on the stock market).
Small and unquoted companies are higher-risk than their larger counterparts, and while they offer more potential for growth, not all of them will succeed. They're also less liquid (more difficult to buy and sell) than larger companies. This could potentially make it more difficult for Barnett to meet large redemptions in the fund.
Approximately 5.8% of the Invesco Income Fund's invested in unquoted companies. And 5.3% of Invesco High Income is invested in them. These levels have remained relatively consistent in recent years and Barnett hasn’t bought any new unquoted investments in the past two years. As the value of both the listed portion of the portfolio, and the unquoted stocks fluctuates, so too will the percentage allocation to unquoted stocks.
Oxford Nanopore, a company that makes portable DNA sequencing devices, accounts for around half of the funds' unquoted exposure. The manager expects the company to list on the stock market in 2020, making its shares much more liquid. This will bring down the funds’ allocation to unquoted stocks.
How have the funds performed?
All managers go through periods of poor performance and it's happened to Barnett over the past few years. The unloved companies he invests in have largely remained shunned by other investors, causing the funds to underperform the broader UK stock market. Past performance should not be seen as a guide to the future though.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| Oct 14 -
Oct 15 |
Oct 15 -
Oct 16 |
Oct 16 -
Oct 17 |
Oct 17 -
Oct 18 |
Oct 18 -
Oct 19 |
|
| Invesco Income | 11.9% | 1.6% | 6.9% | -7.5% | -1.7% |
| Invesco High Income | 12.3% | 2.8% | 7.1% | -7.1% | -3.2% |
| FTSE All-Share | 3.0% | 12.2% | 13.4% | -1.5% | 6.8% |
Past performance is not a guide to the future. Source: Lipper IM to 31/10/2019
The funds performed poorly over the past year too. In addition to the manager's investment style remaining out of favour, the funds faced some company-specific issues.
One of the weakest performers was Burford Capital, a company which finances legal cases in exchange for a share of the settlement. Its share price fell sharply when a US hedge fund wrote a negative piece of commentary calling into question how the company accounts for the value of the litigation claims they finance.
As with all diversified portfolios, there were also a number of stronger performers, including healthcare business Puretech Health, investment platform AJ Bell and used car marketplace BCA, which was taken over by a private equity firm.
Please note, the manager has the ability to invest in derivatives, which increases risk.
More on Invesco Income, including charges
Invesco Income Key Investor Information