Group says it had no need to look for external replacements for Barnett even though the colleagues Ciaran Mallon and James Goldstone chosen to run his funds have also underperformed in the past three years.
Barnett has left Invesco under mutual agreement after a prolonged poor run at the helm of the funds, which lost more than 40% in his last three years in charge.
Management of the funds has been handed to Mallon and Goldstone, who have endured performance issues of their own, though neither has suffered losses as step as Barnett.
Over the last three years, shares in Goldstone’s £158m Keystone (KIT ) investment trust are down 24.1% versus the FTSE All-Share’s 8.6% fall. Shares in his £43m Invesco Perpetual Select UK (IVPU ) investment trust are down 21.1%.
‘No need’ to recruit externally
Invesco chief investment officer Stephanie Butcher, who led the review of its UK equity funds which culminated in Barnett’s departure, said the fund group had not considered recruiting externally for the manager’s replacement.
‘To put it really bluntly, there was no need, because the quality of the individuals on the team and the process within the team was strong,’ she said, on an online presentation to investors discussing the changes.
Butcher acknowledged the ‘considerable time’ Barnett’s funds had underperformed, but emphasised this could not be blamed solely on the manager’s out-of-favour value-driven approach.
‘Specific to Mark’s income franchise there had also clearly been significant performance issues which go beyond a style explanation,’ she said.
While Mallon and Goldstone share Barnett’s broad value-focused investment approach, Butcher said processes employed in running the funds would change.
‘The underlying philosophy is sound, which is the focus on active and valuation-focused fund management, but I think a key part of that is the [process of] challenge and how the team operates together,’ she said.
‘James and Ciaran have already intimated they have to have that sort of active discussion between themselves. I think the wider team are in a strong position now to have that debate, and to really get to grips with the individual stock decisions that are made, with a real risk and liquidity focus as well.’
Butcher emphasised the complementary nature of the pair’s talents, with Goldstone bringing strong ‘market awareness’ from his background as a stockbroker and Mallon more mathematically-driven.
Focus on risk
Goldstone outlined the broad principles he and Mallon would employ on the funds but did not give details on the stock changes they were planning.
‘We understand that you’ll all want to know what we’re planning to do with the portfolios but I hope you’ll recognise that given market impact it wouldn’t be in the best interests of clients to get into specifics at this stage,’ he said.
Firstly, as part of the ‘careful risk management’ of both portfolios, the manager said he was determined to have ‘appropriately-sized positions’.
Under Barnett, the funds built up larger holdings in smaller companies than is typical for income funds, while also suffering from concentration in larger investments that have went on to perform poorly, such as oil company BP (BP).
Improved liquidity was the other principle which Goldstone stressed was ‘key’.
‘Much work has already been done over the last year in that regard. We intend to continue that focus,’ the manager added.
Invesco is in the process of selling unquoted holdings in both funds, after writing them down by an average of 60% at the beginning of April, which knocked the price of both funds by more than 5%.
At the end of last month, according to their factsheets, both funds had well over a quarter of holdings in harder-to-trade smaller companies worth less than £1bn.
Invesco was not able to offer investors a timeline for how long the reshaping would take. ‘The constraint really is liquidity both with the things that we are intending to sell and the shares that we are intending to buy,’ said Goldstone. ‘I just can’t say at this point how long it’s going to take because it’s just not within our control.’
In response to criticisms the UK fund range had grown ‘confusing and in key areas undifferentiated’, Butcher said from now on the High Income fund would target a yield above the FTSE All-Share while the Income fund would become more of a ‘core’ UK equity fund, balancing income and growth.
The funds have shrunk to £3.4bn and £1.5bn in assets respectively, or a combined £4.9bn, down from £24bn when Neil Woodford, Barnett’s predecessor on the funds, announced his departure from Invesco in 2013.