mark barnett considers adding corporate bonds to ailing former merrill lynch uk trust
Invesco Perpetual investment trust manager Mark Barnett is considering adding corporate bond holdings to the former Merrill Lynch UK investment trust after taking over the mandate on 1 January.
Barnett has already cleared out around 90% of the portfolio he inherited from Merrill Lynch Investment Management's Luke Chappell, whose large-cap bias and high gearing position contributed to recent poor performance.
The £122.6m trust, now known by its traditional name of Keystone, has moved down the market cap scale and cut net gearing back to zero.
'The portfolio was in many ways a large-cap-based fund, with big holdings in BT, GlaxoSmithKline, Royal Bank, Barclays and Vodafone, all stocks I'm not interested in at the moment,' Barnett said.
'The fund is now more than 50% in mid-cap stocks and about 40% FTSE 100. The key sector overweights are housebuilding and retail, although it is very stock-specific, as well as biotech and Lloyd's underwriting companies, while the largest FTSE 100 holdings are tobacco stocks and utilities.'
Only three of the 43 legacy stocks remain in the portfolio, which now comprises around 80 holdings. HSBC analyst Paul Locke said this move reflects a shift away from quasi-tracking to a stockpicking and value-seeking style.
Barnett said he is running Keystone along similar lines to the equity portfolio of his other mandate, the £264.7m Perpetual Income & Growth trust.
'I'm focusing on total return in both of the funds, so I'm not too concerned whether we receive that by income or growth because total return is what drives value for shareholders,' he said.
The key difference between the two trusts is that Keystone has no fixed interest holdings, although Barnett said he is considering adding corporate bond exposure to the new trust.
'I'm looking at a number of corporate bond ideas for Keystone ' it is on the agenda at the moment,' he said.
Barnett has also cut the trust's net gearing position to zero, offsetting its gross debt with an equal holding of cash.
Keystone has £40m of debt through four long-dated debentures with a weighted average interest rate of 7.55%, which Close Wins analyst Charles Cade said costs the trust around 1.4% of net assets per year.
Barnett is not considering returning to a geared position in the near future, but there are also no plans for early repayment of the debentures, which are dated as late as 2023 and would cost 14.6% of net assets to repay in full.
Keystone was trading at a discount to NAV of -12.3% on 16 January, above the UK general sector weighted average of -8.6% but almost half the -22.4% discount it reached was in late December before the manager change was announced.
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