Understudy steps up as investors search for income

But the man who replaced him, his understudy Mark Barnett, has turned in respectable figures too.

Talking in the capital last week to shareholders of the £1.3billion Edinburgh Investment Trust, one of his stable of income-focused funds at Invesco, he said the trust had been heavily concentrated in just 10 to 15 stocks, and he had de-risked it.

The trust, 80per cent invested in UK stocks, returned 16.5per cent last year against 6.6per cent for the all-share, and Mr Barnett said despite the fad for global investment, there was still demand from the domestic shareholder for UK-listed portfolios. “There is no currency risk, and you still get exposure to global earnings.”

On Mr Woodford’s exit he said outflow of cash from Invesco’s big funds had ultimately been “very low”, and added: “We had some changes to the team, made some hires and recruited some new individuals, and the team is very stable, the last person to join was a year ago. I feel very optimistic.”

On the fact that Mr Woodford has in his first 12 months managed to outperform just about everyone including the Invesco funds, Mr Barnett said: “In a rising market, taking more risk you will be able to deliver a stronger return...our risk-adjusted return is still very good.”

Being selective is now critical, the manager said, as he warned that the stock market has enjoyed an unprecedented run over the past six years which cannot last.

“The compound growth rate since the low point as 17per cent annually, I don’t think there is a five to six year period in stock market history where we have seen that level of growth. It is realistic to believe that the return from the market is likely to be less strong than it has been.”

Mr Barnett said shares on average were trading at 16 times earnings compared with 10 in 2009 and towards the upper end of the historical range. He said unless company earnings grew, prices would not rise higher, and meanwhile he expected the first interest rate rise in the US in September.

“It will be the first move upwards for a long time and typically equity markets don’t tend to do well around changes in monetary policy, I would anticipate this to be the first of a couple of rounds....once you start moving in an upward cycle it is likely that the bond markets in particular will take their cue.” Bond prices would fall, yields would rise, and equity valuations would take a knock.

China was another potential pressure, as it made the transition to a more consumer-driven economy, reduced demand for commodities, and weighed on inflation.

The third new factor was politics. In the UK, the government was requiring companies to pay a higher minimum wage. In Greece, short-term politics had over-ridden the economic issues, but it would start to unravel again within a year, Mr Barnett predicted. “These are factors we have to think about as risks to stock markets because politicians are getting involved in economic matters more aggressively .”

The £1.3bn Edinburgh Investment Trust, one of his stable of income-oriented funds at Invesco Perpetual, features stocks which have pricing power, such as the tobacco companies, innovation, such as pharmaceutical giant Astra Zeneca, or scope to restructure and become more efficient, such as BP. He likes some consumer stocks, whilst being wary of the internet threat, and companies benefiting from government outsourcing such as Babcock and Capita.

But Mr Barnett said he had reduced the trust’s position in Glaxo, as he believed the dividend was not sustainable.

Sanlam Private Wealth this week released its half-yearly investor guide to UK equity income funds.

Its select group of ‘White List’ funds with top returns over five years includes the RBS Equity Income Fund – a rare appearance for a high street bank fund in such a list. The others are PFS Chelverton Equity Fund, focused on mid and smaller cap companies, Royal London UK Equity Income Fund, Standard Life Investments UK Equity High Income Unconstrained Fund, and JOHCM UK Equity Income Fund.

Funds are monitored for absolute income, capital growth, and volatility.

The mid-tier Grey List includes Fidelity Money Builder Dividend Fund (slipped from White List) and the SLI UK Equity High Income Fund (risen from Black List).

Two substantial funds slid into the Black List, the Newton UK Income Fund and the Jupiter Income Trust, while the Kames UK Equity Income made positive progress but not quite enough to see it escape into the Grey List.

Charles Brand, head of portfolio management at Sanlam, commented:

“We believe investors should look at the implications of investing in equity income funds as volatility increases, after a relatively muted period. Dividend payments are a more stable source of returns than the often unreliable capital gains on shares, which should appeal to investors who have been unnerved by this year’s geopolitical events, many of which are likely to persist.”