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Perpetual Income ramps up buybacks as Barnett suffers £1bn outflows & liquidity alert

21 January 2020

Share buybacks by Perpetual Income & Growth, Mark Barnett’s sole remaining investment trust, peaked at £2m a week in fourth quarter of last year as fund struggled with poor performance and asset sales by the manager.

Share buybacks by Perpetual Income & Growth (PLI ), Mark Barnett’s sole remaining investment trust, peaked at £2m a week in the fourth quarter of last year as the closed-end fund struggled under the strain of poor performance exacerbated by our revelation of £1bn of investor redemptions from the manager’s open-ended funds.

Stock exchange filings show that in the last three months of 2019, the trust bought back £26.8m of shares as it responded to increased sales by dissatisfied shareholders and sought to keep the discount at which they traded below net asset value under 13%.

This was a step up from the previous six months to 30 September when the trust spent £44.9m on buybacks. This was equal to £1.7m a week and with an average of just over £702,000 for each of its 64 transactions in the period.

In the following three months, PLI ramped up buybacks even further, sending its broker into the market 24 times to spend £1.1m on average and just over £2m a week.

The pace of buybacks has declined somewhat in the New Year. Nevertheless, Perpetual Income has so far spent £6.3m buying a further 1.9m shares in January,  around £1.6m a week.

This takes the trust’s total buybacks in the past 10 months to £78m, reducing net assets by around 9% to £805m.

Liquidity warning

The peak in PLI’s buybacks came as investors pulled £1bn from Barnett’s Invesco Income, High Income and UK Strategic Income funds.

The outflows - revealed by our sister website Funds Insider - resemble the scale of withdrawals that led to the suspension of Woodford Equity Income, managed by his former boss Neil Woodford, last June.

Adding to the disturbing similarity, pension provider Zurich has responded to the investor exodus by blocking new investment into its £215m ‘mirror’ Invesco Income and High Income funds, saying it was concerned about liquidity.

In an echo of Zurich’s decision to close its Woodford Equity Income ‘mirror fund to new business a month before dealing in the main fund was suspended, the company said it was responding to poor performance but added:

‘We’ve also become concerned about an ongoing reduction in size of the funds and the manager’s ability to manage liquidity effectively over the longer term ie, to ensure that there are enough sufficiently liquid assets in the fund to manage investment outflows.’

Invesco said it was ‘disappointed’ with Zurich’s decision. ‘Our standard procedures include regular stress testing of liquidity under a variety of conditions and time frames. The results from these analyses confirm that liquidity remains very manageable,’ it said.

Sales pressure

Wth fixed pools of capital, investment trusts like do not suffer the same problems as open-ended funds when investors pull out. Big outflows force open-ended fund managers to sell investments to generate the cash to give to departing investors. 

By comparison, investment trust managers can hang on, able to avoid forced sales of stock because shareholders can sell their shares in the open market if they want to disinvest.

However, in PLI’s case, the downward pressure on its portfolio from investors selling was likely compounded by Barnett dumping holdings from his open-ended funds which were also held by the trust.

Although not as extreme, this also echoes the way shares in the then Woodford Patient Capital Trust, now Schroder UK Public Private (SUPP ), were dragged down by the sale of cross-holdings in Woodford Equity Income.

Our analysis of stock exchange filings shows there were 16 stocks exited or reduced by Barnett at the end of last year which were listed in Perpetual Income’s half-year results to 30 September. 

These included Amigo (AMG), the troubled guarantor backed lender, Capita, the outsourcer, AJ Bell (AJB), the stock broker Invesco had backed before its flotation, and several specialist investment companies including Burford Capital (BUR), British Land (BLND) and Newriver (NRR) real estate investment trust.

Barnett has long been battling poor performance, but has in recent months faced increased scrutiny over the liquidity of his funds and the similarities of his approach with that of failed fund manager Woodford, his predecessor at Invesco.

Morningstar warned in November that the manager’s increasing focus on smaller companies, at over 30% of his funds, could cause a problem in funding withdrawals from investors.

Barnett has dismissed comparisons with Woodford, saying that since he took over Invesco Income and High Income ‘the funds have chartered a very different course’.

The funds now house £2.6bn and £5.7bn of assets respectively, with the impact of December’s withdrawals offset by an upturn in performance over the month, as the funds rallied on the general election result. But they remain mired at the bottom the Investment Association’s UK All Companies sector over three years, down 2.3% and 5.2% respectively. Over the same period the FTSE All-Share has risen 22.5%.

Barnett must hope that they and Perpetual Income can pull themselves off the floor. Barnett has managed PLI for 20 years, his longest stint on any fund. For the first 15 years he delivered excellent results for its shareholders. However, his promotion after Woodford left Invesco five years ago coincided with a downturn in performance as his responsibilities vastly increased as he became head of UK equities and manager of the group’s key equity income funds and investment trusts. 

Woodford’s departure saddled Barnett with four investment trusts, taking on Edinburgh but soon handing over two - Keystone (KIT ) and Invesco Perpetual Select UK (IVPU ) - to James Goldstone. 

His sacking last month by the board of Edinburgh - which replaced Invesco with Majedie - leaves him with just PLI. It held off giving him the boot close to a general election that could affect the direction of markets, but is expected to do so  unless there is a pronounced improvement in the first half of this year.


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