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Perpetual notions

Philip Scott finds out how three of Invesco Perpetual’s leading fund managers produce their outstanding investment results

Neil Woodford is a bit of an anomaly in the fund management business as he is one of only 30 managers with a 10-year track record in the UK.

He recently celebrated 15 years with the Invesco Perpetual income fund and he has been with the firm’s high-income portfolio since 1988, which could be considered as lifetime service by comparison with the merry-go-round trend for fund managers.

Woodford also has the performance to match his longevity of service. Since he took over management of the income vehicle, to the end of October, he has returned an impressive 775.5 per cent. The high-income fund is ranked first in the UK equity income sector over five years.

No doubt, investors will be pleased that he has no intentions to move and he says his sole ambition is simply to continue doing what he is doing now.

His track record has earned him a star manager’ badge but he dismisses any notions of fame. “I focus on doing my job. I am not the sort who puffs his chest out and struts about the place. I have been very fortunate and really enjoy what I do. It is a challenging and infinitely interesting pursuit. I am pretty happy out here in Henley and we do not tend to get embroiled in the City gossip.”

But he is happy to point out his admiration for some of his more urban-based peers, notably Framlington’s George Luckraft and Jupiter’s Tony Nutt, describing them as “some of the smartest fund managers I have met”. He adds: “Healthy competition is a very good thing and it has enhanced the reputation of this sector amongst the saving public.”

Despite his experience, Woodford does not necessarily find that his job gets any easier. Day to day, there are issues which “chip away at his patience” with one such irritant being “the stockmarket’s short-term focus”.

He explains: “I have always believed that I add value by focusing on the long term, that is, three to five years but sometimes focusing on the long-term can be severely testing in a period when the market becomes very short-term focused and ignores the longer-term values.

“It is obvious that the market is becoming increasingly short-term obsessed and in a way this creates a fantastic opportunity because, as a result, there are a lot of busy fools in the stockmarket. I think that collectively trying to add value in the very short term, is a nil-sum game but you have to be incredibly patient at times when things are going against you as it can be very testing.”

The income fund holds 2.1bn and the high-income fund has a total of 4.1bn in assets. Given that Fidelity recently decided to split Anthony Bolton’s 5.1bn special situations fund in half, it begs the question – when is a fund too big?

Woodford believes Fidelity’s decision was not due to the fund size but more a matter of building a succession strategy for Bolton’s gradual departure.

He says: “Size is not an impediment to perform-ance. We have demon-strated that this is the case. My investment style is very long-term focused and it lends itself towards running large portfolios. I am not trading, I am very much making long-term investment decisions. There is not a requirement to move a lot of money very quickly. I am remunerated in terms of performance. If size were becoming an impediment to perform-ance, then clearly it would be in my interest, my personal financial interest, for me to soft- close the funds.”

Being neither growth nor value and in line with the Invesco Perpetual invest-ment philosophy of having no philosophy, Woodford’s tactics can perhaps be best described as long-term, valuation-focused.

In terms of stocks, where does it all go right for Woodford? He says: “I find the utility characteristic quite appealing and I find the market is not good at valuing its characteristics and hence I feel there are very undervalued assets in those particular areas.”

Smoking has also done Woodford no harm as he considers investment in the tobacco industry as one of his best decisions in recent years.

He says: “I tend not to look at sectors per se but I do like the dynamics of the tobacco industry and the investment decision is a function of analysis of each individual company in that sector. I have a big position in the tobacco sector because I have big positions in a number of tobacco companies. It is not a sector call, it may seem a little pedantic but it is an important point.”

Despite declining number of smokers, with, according to Woodford, tobacco consumption falling by 2 to 3 per cent each year, he points out that such fundamental factors are easily tackled by pushing the price up and he adds that another attraction to tobacco is its lack of volatility as it is not a cyclical industry.

Continued on p53″Tobacco companies mitigate the impact of consumption decline by pushing the price up and because smokers are pretty determined they are prepared to pay higher prices to maintain their habit. So even in developed economies, revenues grow and the dynamics are simple. Basically, it is an incredibly efficient industry in many respects which enjoys a very low capital intensity,” he says.

Woodford is confident he can continue to deliver good high-single-digit returns to investors in the foreseeable future. “I would hope we might do it better but I think it would be unrealistic to forecast that as it were and I think it would be better just to be reasonably conservative.”

Then it is the turn of Andy Crossley, manager of the group’s UK smaller companies growth fund and the Invesco Perpetual Aim VCT, to discuss his investment views. He is swift to point out that he does not like being pigeonholed into any particular investment style but if pushed he can sum up his method in four words: “Contrarian, adaptive, diversified, thematic.”

In terms of his contrarian approach, Crossley insists he is never happier than when he finds a company which he believes the market has completely misunderstood but admits such tactics can leave one feeling “quite lonely when buying such a stock”.

He adds: “I do not know when that value is going to be realised but at some point it will be.”

When it comes to being adaptive, he says: “I do not want to be categorised as either growth or value. There is a catchphrase, ‘businessmen buying businesses’ and we do not think of ourselves as a trader, what we are trying to do is understand the business and look at it as a businessman would.”

Crossley explains that he is typically more diversified than most of his competitors and usually holds around 200 stocks, with the biggest rarely being much more than 2.5 per cent of the total assets while the top 10 would make up around 15 per cent of the total assets. “The reason for that is we reject tracking error as the appropriate measure of risk for the retailing investor,” he explains.

Looking at theme stories, Crossley notes that some interesting internal debates take place, looking at areas such as what has happened to the consumer, public spending and what it means for economic growth.

He says: “For example, at the moment, I hold no housebuilders, I hold next to no retailers, no UK property investment companies, and these are big chunks of the market for small caps but that is because of my view of the world.”

I then move on to meet Ed Burke, manager of the Invesco Perpetual UK growth and UK aggressive funds.

He says: “Some days it feels easy, some days it feels difficult but I think as a fund manager it helps a lot if your material is good.”

Burke says he loves his job as a UK fund manager. He says: “There is very little I do not like about my job but obviously it is not pleasant when you are going through periods of underperformance but you expect that and it is part of the job. Hopefully, people take the view that I do, which is that the funds are long-term portfolios but going through rocky periods is never pleasant.”

The UK aggressive and UK growth funds share a lot in terms of holdings, according to Burke.

He says: “The aggressive fund is a more aggressive cut of stock than in the UK growth fund. I think of the growth portfolio as more of a core fund.”

The growth fund has been part of the Perpetual range for many of years, it has a good long-term record and has a lot of smaller investors, says Burke. He believes that these investors have an expectation that the fund should be a reasonable reflection of the best quality UK companies he can find.

Burke has managed the aggressive fund since its inception in 2001 and the 110m fund currently has around 23 holdings and over three years is ranked number one in the UK All Companies sector. The 1bn UK growth fund, was launched in June 1987 and Burke has run it since 2002. Over three years, it has posted a return of 80 per cent, ranking it26th in the UK All Companies sector.

He says: “The aggressive fund has a shorter history and tends to have more of a professional user type, it is institutional and very much a professional product. The name was supposed to send a signal that it is not a vehicle that we expected to be a core fund. Within it are some 25 to 30 companies which I believe have the potential to double in value over the next three years and I will put stocks in more or less with equal weighting.”

Flexibility is key to Burke’s technique. He recalls there have been occasions where he sold shares and later bought them back at a higher price. Why? “Because I realised it was a mistake to sell it. Rolls-Royce would be an example of that. I made a lot of money quickly with Rolls-Royce, bought it, it recovered, had another look around, sold it around 240, 250 and more or less sold out the entire holding. But I had a look at it again, a number of people talked to me about it, I had the opportunity to meet the company again and then realised that there was more substance to this than I realised, that there actually was a growth story here.”

Looking at the current investment environment in the UK, Burke views the market as quite cheap, a factor which he says has has been a big help, but he admits there are things to worry about and he shares Woodford’s concerns about some more global issues, particularly the US imbalances and how they are going to be resolved.

He says: “The UK consumer has begun to wilt and I think this is likely to continue. In addition, Government spending is going to be under pressure, so two of the big engines in the UK economy for the past several years are not going to be as helpful.”

But Burke feels corporate UK is in pretty good health. He believes improved corporate governance is delivering an even playing field and that capital discipline and shareholder awareness in companies is increasing.

He says: “Companies are running their businesses for the benefit of their shareholders. There were always companies in the UK which used to do that but now it is absolutely core to the way firms in the UK behave. It is harder for them to get away with doing stupid deals, they have to justify the capital they are requesting.”

Continued from p51

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