Mark Barnett’s Invesco funds have suffered a £260m writedown on plans to offload their controversial holdings in unquoted companies, which were approaching the limit set by the City regulator following heavy falls in the funds’ value.
Invesco has slashed the valuation of the stocks by an average of 60% to reflect the price they are likely to reflect in a market reeling from the impact of the coronavirus panemic. That has resulted in a 5% hit to the Invesco High Income fund, reflected in yesterday’s price, a 5.4% knock to Invesco Income and a 4.4% markdown for Invesco UK Strategic Income.
The funds’ weighting to unquoted companies had risen dramatically over the last month as the value of listed stocks in the portfolio had plunged amid heavy stock market falls.
In the Income fund, the position in unquoted stocks had risen from 6.5% to 9.2% while in the High Income fund it had increased from 5.3% to 8.4%. In the smaller UK Strategic Income fund the position had jumped from 5.4% to 7.3%.
Under Financial Conduct Authority (FCA) rules, funds are not allowed to hold more than 10% of their assets in unquoted companies.
The funds have tumbled in value this year as stock markets have sold off sharply amid the spread of the Covid-19 pandemic. Since the turn of the year, Invesco Income is down 35.8%, Invesco High Income has fallen 35.4% and Invesco UK Strategic Income has lost 34.2% while the average fund in the Investment Association’s UK All Companies sector has dropped 28.6%.
Assets held in the Invesco High Income fund have slumped from £5.7bn at the end of 2019 to £3.3bn yesterday, according to Morningstar and Bloomberg estimates. Invesco Income has tumbled from £2.6bn to £1.5bn over the same period, while Invesco UK Strategic Income is down from £170m to £103m.
That had inflated the relative size of the funds’ unquoted positions, given their valuations were not subjected to the same daily markdowns delivered to listed companies as stock markets fell.
According to Morningstar, unquoted company exposure in the Income, High Income and UK Strategic Income funds will fall to 3.7%, 3.4% and 2.9% respectively as a result of the writedowns.
Invesco said it was selling the unquoted companies due to ‘a significant shift in risk tolerance towards illiquid or unquoted assets in the last year, and recent market dislocation and opportunities arising’.
Barnett has been facing intense pressure to improve the liquidity of the funds he runs after the suspension, and later liquidation, of the Woodford Equity Income fund run by his predecessor at Invesco, Neil Woodford.
Woodford had held a large proportion of his fund in unquoted companies and resorted to listing some of those stakes on Guernsey’s stock exchange to avoid breaching the FCA’s 10% limit. Dealing in the fund was suspended last summer after Woodford was unable to raise money quickly enough to fund investor withdrawals.
Invesco said the money raised from the sale of unquoted companies would be invested in large and ‘mid-cap’ listed UK stocks ‘which in our view have been heavily discounted due to the fall in equity markets as a result of the current Covid-19 outbreak’.
Jason Hollands, managing director of wealth manager Tilney, was taken aback by the scale of Invesco’s writedown.
‘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 the revaluations we have seen in recent days in the venture capital trust world,’ he said. ‘These have been in the 15% to 25% range since the start of the year.
Juliet Schooling Latter, research director at Chelsea Financial Services, agreed. ‘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,’ she said.
‘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.’