Replacing Neil Woodford was, in 2014, the biggest job in fund management in the UK. But having worked with Mr Woodford for the best part of two decades as part of the old Perpetual team, Mr Barnett seemed the best possible recruit.
However, from the second he took over, the two behemoth income funds were in redemption — both from natural turnover (such as people dying and there being less of a pull for replacement inflows with the star name having been lost), and from those who decided to follow Mr Woodford to his new shop.
The lesson from this — and Woodford Investment Management (beyond the unquoted disaster) — is running funds in redemption is an almost impossible job. Mr Barnett had some big shoes to fill and the fact that his value investing style has been heavily out of favour has compounded those challenges.
Having worked with Neil Woodford for the best part of two decades as part of the old Perpetual team, Mark Barnett seemed the best possible recruitHowever, the bottom line is performance has not been good enough.
In the past six years he has run the Income and High Income funds, which have fallen 16.9 per cent and 15.5 per cent respectively, compared with an average return of 11.7 per cent for the Investment Association UK All Companies sector.
A return to core
Mr Woodford was famed for making strong, high conviction decisions in his funds, such as holding no financials and having near enough maximum weighting to the likes of AstraZeneca and GlaxoSmithKline.
Mr Barnett had a similar style and, while arguably not as high conviction as Mr Woodford, I would not see him as a core investor. The liquidity issues in the fund have also been a major challenge, but ultimatelyMr Barnett did not change the construction of the portfolio around quickly enough.
Key Points
- Mark Barnett had big shoes to fill following Neil Woodford's departure
- His performance at the Invesco fund has been poor
- Conditions are not good for value investing
Ciaran Mallon and James Goldstone will now take over the funds — both of whom I consider to be more core investors. That will help, but it will take time to reshape those portfolios and I would expect to see more outflows in the near term.
I have been asked quite a few times in the past 12-18 months whether value investing is now dead as a strategy.
I have always reiterated its benefits and that at some point it will rally.
We have now seen three senior value fund managers (Mr Barnett, Mr Woodford and Alastair Mundy of asset manager Ninety One) all depart from their roles in the past 12 months as the style continues to flounder.
The pool of value managers in the UK is clearly getting smaller, but we saw this happen 20 years ago before the tech bubble burst, which resulted in value investing dominating the first decade of this century.
The truth is, value investing does not look attractive in the short to medium term.
The impact of QE
Put simply, historically low rates and some £2tn of quantitative easing in the past decade have been a disaster for value investing.
If those factors led to growth investing dominating the past 10 years, we can expect the same narrative in the future, given the past two months have seen rates go even lower and even more QE pumped in to stabilise the global economy.
I remember using Google to find out what the impact of QE was back in 2008 and I was told in no uncertain terms it would lead to inflation. In the past decade we have had no inflation, so the previous history lesson was obsolete.
Perhaps the speed of delivering such a large amount of QE could lead to an inflationary outcome on this occasion?
It will not happen in the near future, because there is no demand for the likes of airlines or restaurants due to the coronavirus — that will take time to change.
Inflation is also an offshoot of a booming economy.
By contrast, we are expecting a spike in unemployment and a huge drop in GDP globally because of the pandemic.
The conditions for value are nowhere to be seen, but under no circumstances would I rule out inflation in the next decade, which is supportive for value companies.
For the past five years we have said value looks unbelievably cheap relative to history and that this was a rare opportunity to invest. We were wrong and now it has just become significantly cheaper.
We always look for a catalyst for a change in style and maybe these low valuations are the actual catalyst. For now, we are heavily tilted towards growth — value is very much a long-term play.
For those looking at value funds today, the Schroder Recovery fund, managed by Nick Kirrage and Kevin Murphy, is a strong option, as is the River & Mercantile UK Recovery fund and the Fidelity Special Values Trust, managed by Hugh Sergeant and Alex Wright respectively.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services
