When looking to add a new manager to a portfolio, going for a well-known and experienced stockpicker with a long-track record, seems like a sensible thing to do.
However, when such a manager runs open- and closed-ended strategies, such as FE Alpha Manager Mark Barnett (pictured), deciding which to back can be a difficult call to make.
Barnett – who is head of UK equities at Invesco Perpetual – was named sole manager on a number of the asset manager’s UK income strategies in 2014 following the departure of star manager Neil Woodford.
He specialises in UK equity income investing and believes stocks that are exposed to the domestic economy are undervalued.
But, despite being among the most experienced fund managers in the industry, most of his strategies have seen a weak performance during the past 12 months.
Some of the reasons for that include current sentiment towards sterling and UK domestic-orientated companies since the EU referendum and an outperformance of growth over value investing, the manager’s preferred approach to picking stocks.
Indeed, Barnett takes contrarian positions in companies, sectors and themes which are out-of-favour in the market.
As such, his trusts are trading on deep discounts to net asset value (NAV) and those wishing to back Barnett could invest at an attractive entry point.
But as investment trusts tend to be more volatile than funds, many investors may want to opt for his open-ended mandates instead.
So, should investors looking to gain UK equity exposure buy into Barnett’s open-ended funds or his closed-ended trusts?
Performance of funds YTD
Source: FE Analytics
Taking into account the managers funds’ various similarities, we decided to ask three industry professionals about which of his flagship strategies – Invesco Income and Edinburgh Investment trust – they prefer.
As well as being managed by Barnett, both vehicles have many holdings in common including BP, British American Tobacco, Burford Capital, Royal Dutch Shell and Legal & General among their top 10 holdings. However, there are some slight differences.
The £3.9bn Invesco Income fund has experienced a weaker 2018 than the FTSE All Share benchmark and its average peer, down by 6.87 per cent, it currently yields 3.54 per cent and has an ongoing charges figure (OCF) of 0.91 per cent.
The diversified portfolio currently contains 118 holdings, with the largest sector allocation invested in financial stocks (41.52 per cent) followed by industrials (14.2 per cent).
The £1.6bn Edinburgh Investment Trust, meanwhile, has a slightly lower weighting to financials (39.8 per cent) and industrials (13.7 per cent) and, as the managing director of FundCalibre Darius McDermott notes, it is slightly more concentrated.
The trust also has a higher yield of 3.9 per cent, and a slightly different investment objective. While Invesco Income aims to achieve a reasonable level of income together with capital grow, the £3.9bn trust targets an increase of the NAV per share of the growth in line with the FTSE All Share index and growth in dividends per share in excess of the rate of UK inflation.
According to McDermott, the trust is not only cheaper – it has ongoing charges of 0.55 per cent – but it also has a couple of extra “bells and whistles” it can use, including its ability to borrow money to make additional investments (gearing).
“Edinburgh Investment Trust can use gearing [currently at around 9 per cent] and a revenue reserve to maintain dividend payments,” noted McDermott.
Charles Stanley Direct pensions and investments analyst Rob Morgan agrees with McDermott: “I believe the investment trust could offer some advantages over the funds. Firstly, there is a cost benefit with ongoing charges slightly lower.”
“Secondly, the ability to dip into revenue reserves should be also advantageous and allow greater focus on income growth,” he said.
However, as Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC) noted whilst gearing magnifies the performance of an investment company, if the performance is poor, investors should be aware that gearing will magnify losses.
Discount/premium of Edinburgh Investment Trust over 5yrs
Source: FE Analytics
Data from the AIC shows that Barnett’s Edinburgh Investment Trust is trading at a 9.2 per cent discount to its NAV, which can be seen by investors as a good entry point.
“The trust is currently trading towards the bottom of its historical range. So, if [and when] UK equities generally become more popular and his style comes back into favour, investors in the trust could be rewarded more than those in the fund,” said McDermott.
However, Adrian Lowcock, head of personal investing at Willis Owen, said investors are not getting such a great deal at the moment.
“At present the discount to NAV may look attractive at around 9 per cent, but this is fairly in-line with the long-term average,” he explained. “So, whilst investors are getting the assets for less, they are not getting a clear bargain at the moment.”
However, Lowcock noted that the trust is likely to continue to benefit from any rise in equity markets, as investments trusts tend to outperform during bull markets.
“However, the downside is that in volatile and falling markets they can underperform,” he added. “Whilst markets have been volatile, I do not believe this is yet the end of the current market cycle and indeed given how unloved the UK market is at present I would expect this trust to do better when the UK market turns.”
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
When deciding between the two, McDermott said it comes down to how much conviction or belief investors have in Barnett and his style.
“Mark Barnett has had a tough time of it recently and both the fund and the trust have underperformed quite significantly over the past 12 months or so,” said McDermott.
“If you think this will turn around and like his style, the trust may be the way to go: he has more conviction in terms of holding concentration and can use the gearing.”
Given the advantages investment trusts offer over funds, Charles Stanley Direct’s Morgan would also pick the Edinburgh Investment trust.
“Overall, I would pick Edinburgh, especially given the circa 9 per cent discount to net asset value right now, which could narrow when sentiment towards UK equities improves,” he said.