Invesco Perpetual’s Mark Barnett has said the UK economy is unlikely to grow as quickly as it has done recently and highlighted anaemic wage growth as a major concern.
The manager’s comments came after the International Monetary Fund said last week its forecast for UK economic growth remained the same at 3.2 per cent this year and 2.7 per cent in 2015. This was in spite of it marginally cutting its global growth forecast to 3.3 per cent from 3.4 per cent.
“The UK recovery is on track but I am not sure whether the rate of change will continue to accelerate,” Mr Barnett said.
“We have probably seen the best of the acceleration in the recovery but the UK will continue to grow in a satisfactory but slightly less robust fashion.”
The manager said specific areas of the economy that “concerned” him were manufacturing because the sector was “less strong” than he had expected and he added that the service sector was also weakening.
“The main thing I worry about is wage growth and the underlying level of that is now showing signs of recovery,” he said.
“The UK is built significantly on consumption and how are households going to fund that consumption if they are running their savings down?
“We need some real wage growth.”
The manager said there would be some respite for the population given inflation, particularly in non-discretionary items, had fallen, but he thought low wages could be a persistent feature of the UK economy for some time.
“When the economy was going through the correction, the labour force priced itself into the labour market by accepting low wages instead of not having a job,” he said.
“Now the recovery is here, the power of the workforce has decreased and the employer can bid down wages.”
Mr Barnett said a scarcity of labour would improve the situation, but countered this with the fact immigration was high in the UK, meaning that scarcity was unlikely to occur.
“It seems to me the power of the corporation over the workforce will still be maintained and I doubt we will see a big pick-up in wage growth,” he added.
The manager said he expected company earnings growth in the UK to be between 3-5 per cent, much lower than the 9-10 per cent expectation at the beginning of the year.
He said this meant he had to be “vigilant” when selecting companies and maintained the combination of stocks in his portfolio would be able to deliver greater than the market average of 4-5 per cent.
The £12.5bn High Income fund was removed from the IMA UK Equity Income sector in March, just as Mr Barnett took on the fund from Neil Woodford.
The £6.6bn Income fund was also removed from the sector in August, although Mr Barnett had only been running this from March as well. At the same time Mr Barnett’s UK Strategic Income fund was removed from the sector.
To qualify for the equity income sector, funds must deliver a yield of 110 per cent of the FTSE All-Share yield within a three-year period.
Since taking on the two larger funds, Mr Barnett has delivered positive returns.
Both funds have achieved 1.4 per cent since he began managing them in March, in spite of the FTSE All-Share index falling 4.1 per cent during that period, according to data from FE Analytics.
The average performance by peers in the IMA UK All Companies sector has been even worse, with an average loss of more than 6.5 per cent, according to the data provider.
The funds’ large allocation to sectors that are often deemed less economically sensitive, such as pharmaceuticals and tobacco, is likely to have helped its performance.
Key changes to Mark Barnett’s largest funds
The fund manager has only been at the helm of Invesco Perpetual’s High Income and Income funds since March but he has already started to put his stamp on them.
Mr Barnett said he had made the top 10 holdings less concentrated than his predecessor Neil Woodford, meaning these now accounted for 45 per cent of the funds instead of 55 per cent.
The manager said he had also reduced his exposure to the healthcare sector in the past few months, even though he still had confidence in the area to deliver returns.
Perhaps most interesting though is the fact Mr Barnett backed the initial public offering (IPO) of automobile company AA – something Mr Woodford also did in his CF Woodford Equity Income fund. Mr Barnett has also added another IPO in Game Digital, a computer games retailer.
In another nod to Mr Woodford, Mr Barnett has embraced the unquoted stocks left behind in the two portfolios by the former Invesco manager. Investing in early-stage companies was something Mr Woodford had become renowned for, with the tail of his portfolio famously including several unquoted businesses.
Mr Barnett has said he is dedicated to holding the businesses he has inherited, a claim backed up by his move to hire smaller company specialist Fred Bouverat from Numis Securities to assist in the analysis.
However, he has gone a step further and is using these unquoted stocks to add other unquoted businesses. He has, off the back of this strategy, bought into Pure Tech, an American company that specialises in commercialising early-stage science and technology from universities.
