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Mark Barnett: I don't buy the bull story for banks

Peer-to-peer lending investment trusts have delivered a mixed performance, but Invesco Perpetual's Mark Barnett, a big backer of the sector, is still bullish.

In the final instalment of our series of video interviews with the manager of the Invesco Perpetual High Income and Income funds, he outlines why he is still excited by the opportunities presented by alternative lending.

But he's less excited by more conventional lenders, like the high street banks. Barnett isn't following Neil Woodford, who he succeded at Invesco Perpetual, into Lloyds (LLOY), arguing the bull case for banks is overdone. 

Can't watch now? Read the transcript

Dylan Lobo: One thing that does stand out in your portfolio as well, is the omission of Lloyds.  A lot of your peers have been buying into Lloyds and some of them have described it to me as one of the most exciting dividend growth opportunities on the market now, with interest rates going up and finally, escaping the shackles of the State.  Why haven’t you bought Lloyds?

Mark Barnett:  In part because I don’t think the most optimistic scenarios for the dividend growth from these businesses is going to come through and kind of, the bull case is predicated on, we’ve finished with regulation, in terms of the capital-, the increases in capital required to be held by the banks and that actually, any surplus capital generated is going to shifted into higher levels of distributions and I think-, I accept that that is in part going to happen, but I don’t believe the more optimistic scenarios around that.

The other big bull story for banks is around costs and in an environment where top line growth is limited, which is the case, these businesses are driven towards cutting out large numbers of costs, which has been happening, but again, at a pace probably slower than the-, you know, it looks easy on paper, but actually, in delivering this kind of cost story, I think it’s slower to come through.

DL: So it’s a bit of a contrarian call.

MB: Yes. Well Lloyds-, and also I would say just to finish off the point, within the banks there are a range of valuations. I mean, Lloyds is at the upper end of that range, alongside HSBC, okay it’s not a UK bank, slightly different, but Lloyds is not super cheap frankly. On the basis of the dividend growth looking on an optimistic outlook, it’s got a decent yield, but again, I’m just not as optimistic as some people.

DL: Moving on Mark and we’re sticking to financials.  When I spoke to you two years ago or so, just after you’d taken on the funds from Neil Woodford, income funds, you said to me—correct me if I’m wrong, that peer-to-peer lenders were one of the most exciting, if not the most exciting income opportunity out there and you still have a high exposure to this sector.  What is your view on peer-to-peer lenders now?  Are you still as excited about their prospects?

MB: Do I think there’s an opportunity in that area? Yes I do, absolutely.

DL: You’re still as excited.

MB: I still think there is an opportunity, yes.  So I’ve got a range of trusts within the funds that are exposed to SME lending, both here and overseas through something like the Funding Circle Income Fund or through the Honeycomb Investment Trust or through Hadrian’s Wall, which are doing something similar in the UK. Some have secured lending, some aren’t secured lending and those have been pretty successful. P2PGI, which is the largest trust that was created in this area, has been less successful. Although, as you may have read, they’ve just changed managers. That’s partly under my instigation because I’m the largest shareholder in P2PGI. I wasn’t satisfied with the performance of that trust. So I encouraged the board to do a ‘beauty parade’ to examine other options and they have done that and we’ve moved the-, the mandate’s been moved. So I think there’s been mixed success in this area. I do think this is an area which is appropriate still and I’m excited about the opportunity because the big banks are simply not interested in lending to certain segments of the economy.

DL: Just to conclude, what is the income opportunity right now that excites you more than any other in the market?

MB: Stocks like Derwent, Assura, New River Retail, British Land, Shaftesbury, these are big core holdings for me in the real estate sector and on the other hand, in terms of the big multi-nationals, many of which don’t offer that much income, other than the tobacco sector which I think still looks very promising from an income perspective, particularly Imperial, which has got a very, very high yield on it, but British American Tobacco as well.  In the big international companies where I’ve been winding down to a certain extent some of the exposure, I think the oils still look very attractive from an income perspective.  They’ve performed quite well in the last few months, but they’re still yielding generously.  Well over 5% and over time, I expect we still start to get some dividend growth out of those stocks.

DL: That’s a very nice positive note to end on Mark, thanks for joining us today.

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