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Woodford Protege Mark Barnett Hit With Morningstar Downgrade

Woodford Protege Mark Barnett Hit With Morningstar Rating Cut

(Bloomberg) -- Neil Woodford’s protege Mark Barnett, who followed his mentor’s lead to load up on less liquid securities, has been hit with rating downgrades on two of his funds at Invesco Ltd.

Ratings firm Morningstar Inc. cited concerns about the way he’d changed the focus of his funds to buy smaller companies that are less easy to sell. Analysts at the firm cut their ratings on Barnett’s Invesco Income fund and the Invesco High Income fund to “neutral”.

Barnett’s style drift echos that of Woodford, whose investment business collapsed this year in the wake of redemption requests he couldn’t meet. The Invesco manager has invested more than two thirds of the 6.1 billion pound ($7.9 billion) Invesco High Income fund in micro-, small- and mid-cap stocks, up from less than a quarter when he took over in 2014, according to data through September compiled by Morningstar.

“Such a shift in market-cap profile for a strategy with sizable assets has made the overall liquidity profile less attractive and has resulted in significant ownership of many smaller names,” Peter Brunt, an analyst at Morningstar, said in a report. “While the group has been able to meet redemptions so far, Barnett’s continued intent on investing in smaller names give us cause for concern.”

Woodford Protege Mark Barnett Hit With Morningstar Downgrade

When Barnett took over the Invesco High Income fund in 2014 it had assets of 13.1 billion pounds. They’ve since depleted to about 6.1 billion pounds, according to Morningstar. The Invesco Income fund has seen assets drop to 2.7 billion pounds from 8.3 billion pounds in the same period.

The outflows underscore the perils for managers who adopt a strategy that includes thinly traded securities. Investors are already skittish in a challenging environment for active managers where cheaper passive funds are threatening the once-dominant market position of star fund managers.

“The strategy of these funds has not changed,” according to an emailed statement from an Invesco spokeswoman. “Our exposure to selective U.K. domestic oriented companies supports an attractive outlook for investors, and clarity on the U.K.’s future relationship with the EU is likely to prove a positive catalyst for companies that have de-rated under-sustained political uncertainty.”

A “neutral” rating indicates that a fund isn’t likely either to “deliver standout returns” or “seriously underperform,” according to Morningstar.

“Such heavy redemptions are all too reminiscent of the recent Woodford debacle, where the toxic combination of poor performance, illiquid investments and investor redemptions led to the suspension of the fund and, ultimately, its closure,” the analysts wrote.

The Invesco High Income fund has returned 0.8% year to date, some 10.8% behind the average performance of a fund in the Morningstar U.K. Equity Income category, according to the report. Over five years it has produced annualized returns of 2%, some 3.7% behind its category average.

To contact the reporter on this story: Suzy Waite in London at swaite8@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Chris Bourke

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