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Investment principles and risk


Why the US Budget storm hasn’t blown over yet

John Housden

Last month’s US budgetary rows have been deferred, not settled.

The US entered its new financial year on 1 October with no approved budget, causing a bureaucratic shutdown.  The sad fact is that the US Congress has not agreed a budget since April 2009.

On October 17 Uncle Sam was due to reach his borrowing limit ($16.7trn), but was prevented from entering the unknown territory of default by the inevitable last minute ‘agreement’. This was a piece of procrastination which puts to shame Europe’s efforts to defer its financial crises. A steady flow of problems is due to emerge/repeat over the coming months:

Date Deadline
Dec-13 A bipartisan group from the Senate and the House of Representatives is due to reach an agreement to reduce the Budget deficit.
Jan-01 The second round of automatic spending reductions – the sequestration – will start if there is no December 13 agreement.
Jan-15 October’s short term budget fix expires. If nothing replaces it, another government shutdown will begin.
Feb-07 The temporary suspension of the debt limit agreed in October comes to an end and in the absence of a resolution default worries reappear.

Wall Street was not much ruffled by October’s antics, partly because of the Federal Reserve’s actions. In September the Fed surprised the Street by deciding not to start tapering its $85bn a month of quantitative easing (QE). The shutdown disruption to the economy and statistical flow meant no start in October. No change is likely when the Fed next convenes in mid-December, the last meeting before Janet Yellen replaces Ben Bernanke as Fed chair. As the 28/29 January meeting potentially coincides with the next shutdown show episode, the market is hoping that QE taper will not be announced until at least the next Fed meeting on 19 March.

We are back to bad-news-is-good-news times. However, the reverse is true: if the US economy perks up and the Fed starts tapering before April, good news could be very bad for the markets.


Woodford is leaving the building – but don’t panic

Steve Williams

Your holding in the Invesco Perpetual High Income fund would now be valued at £23,642, had you invested £1,000 when it launched in February 1988.

That represents an annualised return of just over 13%. Over the same period, the FTSE All Share Index has grown by a little under 10% pa, and the FTSE 350 Higher Yield Index has grown by almost 11% on the same basis.

Granted, the Invesco fund has a higher risk profile than either of those indexes, that after all it is a likely source of excess return. But the fund’s annualised volatility is a shade lower than both and the fund’s maximum drawdown – the worst run of losses from peak to subsequent trough – is measured at 33%, compared with 45% for the FTSE All Share and 48% for the FTSE 350 Higher Yield Index. Those remarkable returns would only be presented to investors with remarkable loyalty.

It is, perhaps, unusual for an investor to hold a fund for so long. But it is also rare to find a manager who has remained at the helm of a fund for more than 25 years. Added to Neil Woodford’s exemplary performance and staying power is the sheer volume of capital under his management – his Income and High Income funds at Invesco Perpetual account for £25 billion.

And so it is that news Mr Woodford will leave in April next year has come as a blow to Invesco Perpetual. Reportedly, his decision to leave Invesco is “a personal one based on [his] views about where I see long-term opportunities in the fund management industry.” Furthermore, his “intention is to establish a new fund management business serving institutional and retail clients”. Doubtless he will be successful in attracting investors’ capital in his new venture.

Invesco Perpetual’s flagship fund will not be left without a first-class manager. Mark Barnet has a terrific track record, leading the Invesco UK Strategic Income fund to outperform the same indexes mentioned earlier. In many regards Mr Barnet is a natural successor to Mr Woodford, and investors can expect a reasonable degree of continuity when it comes to style and geographic profile (both managers have, in the past, shown an inclination toward limited overseas exposure). He is described by Invesco Perpetual’s CEO as having “the same active, value-driven investment approach and long-term focus”.

But Mr Woodford’s departure does leave some investors with an uneasy feeling. Shares in Invesco Perpetual’s parent company, Invesco, fell 5% on the day his departure was announced. According to the Financial Times, when Richard Buxton shifted to Old Mutual, the Schroder UK Alpha fund “lost 40% of its assets under management in the [following] three months”.

Of course, the impact of flows in to and out of an open-ended fund, like the High Income fund, are limited, certainly in comparison with a closed-ended fund so, aside from the manager’s departure, there is no obvious reason for investors to flee.



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