And, while much remains the same, it is clear that Barnett has stamped his authority and style on the two funds.
The biggest initial change Barnett said was to set an individual holding ceiling of 6% of the portfolio, which implied an immediate reduction to the fund’s two biggest holdings: AstraZeneca and GlaxoSmithKline.
While Barnett still holds significant stakes in both companies, 4.4% and 3.4% respectively, they are much lower than the 9.7% and 9.3% stakes Woodford left behind. This also means the top 10 holdings account for only 42.7% of the total portfolio, compared to 58.2% a year ago.
That said, the majority of the top ten remains remarkably similar, the only new entrants into the top 10 are Reynolds American, which, at 5.7% of the fund is Barnett’s largest holding, and a 3.2% stake in BP.
Barnett added that he had introduced eight new FTSE 100 stocks during the year: Babcock, BP, Compass Group, Friends Life, Legal & General, Reed Elsevier, Smith & Nephew, and London Stock Exchange, as well as a selection of mid-caps.
Mid caps now account for around 20% of the portfolio, up from 14% 12 months ago. “While such mid-size companies may offer a lower current dividend yield, this is often, in my view, offset by the prospects for superior long-term profit and dividend growth,” he said.
Another big change to the fund’s DNA is its position on unquoted holdings. While 4.9% of the fund remains invested in unquoted holdings, Barnett said that focus has shifted.
“In order to optimise long-term returns potential and reduce downside risk we have chosen to focus our investment selectively in co-investment opportunities presented to us by the management teams of our long held stakes in ‘technology transfer’ companies such as Allied Minds, Imperial Innovations and IP Group,” Barnett said.
He explained that because these companies specialise in forming, funding and nurturing start ups, they provide a good additional layer of due diligence.
At a sector level Barnett has brought down the High Income Fund’s exposure to healthcare from 35.4% to 23.4%, while marginally increasing his weighting to tobacco and almost doubling his exposure to financial services. He also has a 3.2% exposure to oil and gas through his investment in BP, up from 0% a year ago.
On the financials side he said: “I remain unconvinced by the attractions of UK banks and therefore continue to have no exposure there. I have, however, added to other financials exposure, including life insurance and real estate.”
Looking ahead
Barnett said he remains focused on finding companies that can perform across many different macro-economic outcomes.
While encouraged by recent falls in oil prices, which he says should help boost consumer demand, he added that central banks remain in no hurry to raise rates. However, he added, there is a possibility that the Fed may raise rates in the near future.
“The market has had plenty of time to prepare for higher US interest rates and the US dollar has strengthened partly in anticipation. However, the reality may still cause a shift in investor behaviour and, if history is a guide, a compression of the PE ratio which has been gently rising for some years.”
Overall, he said: “Dividend growth in 2015 will need to be justified by underlying earnings growth as the pay-out ratio cannot keep rising sustainably from current levels. Equally we cannot rely on a significant re-rating of the market as valuations are already on the expensive side of fair value in my view.”
