Invesco reduces value of unquoted holdings in UK funds by 60%

Once billed as Neil Woodford's protégé, Mark Barnett has produced a sustained period of underperformance in recent years.

Invesco has marked down the value of its unquoted holdings by 60% across a number of its UK equity funds, including those managed by Mark Barnett.

According to Juliet Schooling Latter, research director at Chelsea Financial Services, this leaves investors in Barnett’s funds – Invesco High Income and Invesco Income – nursing an estimated 5% loss.

Once billed as Neil Woodford's protégé, Barnett has produced a sustained period of underperformance in recent years. His funds have a much smaller allocation to unquoted companies (5% in total in November) than the stricken LF Woodford Equity Income had when it suspended last June.

Invesco said the move will enable the funds to increase exposure to larger companies, which now have cheaper price tags following the market sell-off that started on 21 February.

It will also have the effect of boosting liquidity; however, Invesco did not make reference to this being a concern or a factor behind the write-down, instead stating it has been driven by the value managers see in publicly quoted equities.

In a statement to investors, Invesco said that over the past year it has “substantially increased liquidity within [its] UK portfolios and increased allocations to a number of larger cap names.”

It added: “We have decided that now is the right time to go further with these changes and to dispose of unquoted assets held in those funds, in order to redeploy capital raised to publicly quoted assets.”

The write-down has drawn criticism from fund analysts. Schooling Latter described the move as a “little drastic”.

She says:“Invesco’s decision to write down 60% of the illiquid, unquoted stocks in Invesco High Income and Income funds seems a little drastic. In the venture capital trust space, where managers specifically invest in unquoted companies, we have seen write-downs of around 5%-22%. Invesco’s write-down is three to 10 times larger and will result in an approximate 5% loss for the funds’ unitholders.
“We understand Invesco’s wish to move away from these assets into more attractive parts of the market, but the amount of write-down is unjustified in our view. While there may be investor appetite for the funds to hold fewer unquoted stocks, I would doubt that investors would want this at the cost of a 5% drop in the value of their investments.” 

Jason Hollands, managing director of Tilney Group, similarly describes the mark-down as “substantial”.

He says: “Reductions in the value of unquoted holdings are understandable in the current period of economic turmoil arising from the coronavirus pandemic but this, nevertheless, is a very substantial markdown compared to some of the revaluations we have seen in recent days in the venture capital trust world. These have been in the 15% – 25% range since the start of the year.
“In the short term, it represents an immediate hit to the value of these funds at a point where the markets are sharply down and investors have endured a run of steep underperformance in Barnett’s funds.”

Invesco said: “Once realised, this capital will be reallocated to publicly listed equities which in our view have been heavily discounted due to the fall in equity markets as a result of the current Covid-19 outbreak.

“We recognise, of course, that a reallocation of capital from unquoted to publicly listed equity is a change in the fund composition. However, these are extraordinary times which call for decisive and positive action to look after the best interests of clients in the short and longer term.”

Hollands adds that Invesco has been working to reduce the exposure of its open-ended UK equity funds to unquoted holdings for some time, but has been doing so against the challenging backdrop of large fund outflows. 

He adds: “This move should put an end to the liquidity concerns that have risen to the fore since the Woodford Equity Income fund was suspended, while also creating the potential for an material uplift at some point, for example in the event of future disposals or IPOs.”