Should you stick with underperforming fund manager Mark Barnett?
While Neil Woodford’s every move continues to be scrutinised by the market, another star fund manager is also having a tough time of late. Two investment trusts run by Mark Barnett have reported full year results and they’ve both underperformed their benchmark indices for the second year in a row.
Edinburgh Investment Trust (EDIN) saw its net asset value (NAV) fall by 5.9% in the year to 31 March 2018 and the share price down 6.7%. The previous year saw NAV rise 14.4% and the share price up 11.2%.
Perpetual Income & Growth’s (PLI) NAV in the year to 31 March 2018 fell by 5.6% and its share price was down 4.9%. The previous year saw NAV up 9.6% and share price up 4.2%.
Both trusts are benchmarked against the FTSE All-Share total return index which grew by 1.2% in the year to 31 March 2018 and was up 22% in the previous year.
While the relative performance is disappointing, it shouldn’t be the trigger for investors to dump either investment trust.
Barnett has a superb track record with a consistent investment process that has proved to be successful on many occasions in the past. He should be applauded for not deviating from this process simply to make short-term gains.
WHEN TO WALK AWAY
Fundamentally it raises the question of when you should give up on a star manager. Investing is a long-term process and there will be times when market conditions work against certain fund managers.
Better reasons to consider walking away from a manager should be deviation from a proven investment process and having a portfolio that has become too similar to the benchmark index. After all, you are paying a fund manager to beat the market – if they aren’t adding value, you might as well have a tracker fund.
Last year Neil Woodford apologised for his performance since 2016 but said he wouldn’t change his process. He commented: ‘In terms of what it means for me as a fund manager, it’s very, very important that through a period like this that you maintain your investment discipline.
‘The temptation is to take the easy option, to sort of hide in the strategy that everybody else is pursuing. And then all the attention, and all the fuss, and all the criticism would go away. But that would be a betrayal of my investment principles.’
KEEPING THE FAITH
While the short-term performance hasn’t been good, Edinburgh’s five-year track record (encompassing Barnett’s entire duration as manager since January 2014 plus a bit under his predecessor Neil Woodford) shows 25.8% NAV appreciation versus 15.2% from the benchmark index.
The investment trust team at stockbroker Numis hold Barnett in high regard as a manager. They say it is always tempting to react to a period of underperformance by selling. However, they retain faith that the Edinburgh team’s relative performance will improve.
‘At a time when market valuations appear full, we favour buying investment trusts with experienced active managers taking a long term investment approach, rather than those focused on relative index weightings,’ says Numis.
If you’re looking for a bargain and are prepared to look past the recent performance setback, it is worth noting that Edinburgh’s portfolio bears little resemblance to the FTSE All-Share and it currently trades on an 8.8% discount to NAV – a significant drop from the 6% premium it commanded in 2013. (DC)