Invesco European Equity Fund (UK) Q1 2020 review

Posted by Guest in Fund and industry updates category on 13 May 20

The update below is authored by Invesco and reproduced, with permission, by Willis Owen. 

This page should be read in conjunction with the investment risks below.

Market review

European equities fell sharply over the quarter as news emerged that the spread of the COVID-19 was accelerating across the western hemisphere. Investors were spooked by fears of an impending global recession as national governments began implementing extreme measures to contain the spread of the virus. Against this backdrop, investors fled stocks in search of safer assets and all sectors of the broad equity market returned negatively.

Throughout the quarter, the European Central Bank announced new asset purchases to support markets, and national governments also began to step up their efforts by announcing large fiscal packages to help their local economies while they remain under lockdown.

Performance review

In the three months to the end of March 2020, the fund returned -28.7%, underperforming the fund’s reference benchmark, the IA Europe Excluding UK sector, which delivered a return of -18.9%.*

Past performance is not a guide to future returns.

The start of the year was tough for us: above all, the renewed stark outperformance of the Growth and Quality stocks in our markets and underperformance of Value stocks was a powerful headwind for our fund – which has a significant tilt towards the latter.

In late-Feb and we began to witness an extreme sell-off fuelled by concerns over the spread of COVID-19 and subsequent measures by governments. An oil price war just added further fuel to the fire.

Against this backdrop, it is then unsurprising that our overweight positioning in Financials (specifically banks) and Energy have been the greatest drivers to relative underperformance. An underweight position in Health Care has also been a notable area of relative underperformance.

What have we been doing during the sell-off? The first working day after the breakout of the oil price war, we reduced our overweight position in energy by selling one oil major. Overall, exposure to Materials, Cyclicals (stocks that are sensitive to economic cycles) and Financials has been preserved, though with an in-depth review of stocks’ relative merits.

We have increased our overall exposure to Utilities and Health Care, not from a desire to become more defensive but because of a clear opportunity to buy into some stocks on advantageous terms. Telecoms, a longstanding ‘Defensive’ strand of the portfolio, has now started to play the positive role for which we had included them in our portfolio construction, and we have added to some positions on share price weakness. 

Performance (% growth)* Invesco European Equity Fund (UK) IA Europe Excluding UK sector
3 months  -28.7   -18.9
6 months  -27.0   -16.8
1 year  -22.7     -9.2
3 years  -23.0     -5.5
5 years    -2.8     15.1
Standardised rolling 12 month performance  (% growth)* 31.03.15 - 31.03.16 31.03.16 - 31.03.17 31.03.17 - 31.03.18 31.03.18 - 31.03.19 31.03.19 - 31.03.20
Fund  -5.3 33.3 3.8 -4.0 -22.7
Reference sector -1.8 24.1 5.8 -1.7   -9.2
Past performance is not a guide to future returns.

*All data is as at 31 March 2020, sourced from Invesco unless otherwise stated. Fund and benchmark average performance data is source: Lipper, Fund performance figures are shown in Sterling, inclusive of reinvested income and net of the Ongoing Charge and portfolio transaction costs. Reference benchmark average performance is calculated on an equivalent basis. Fund performance figures are based on the Z accumulation share class. Performance figures for all share classes can be found in the relevant Key Investor Information Document. The IA Europe Excluding UK Sector is a Comparator Benchmark. Given its geographic focus the Fund’s performance can be compared against the Benchmark. However, the Fund is actively managed and is not constrained by any benchmark.

Strategy & Outlook

In moments like this it is not unusual to see price movements which aren’t necessarily a faithful reflection of rational markets. Consequently, we’d caution against interpreting our underperformance in the market downdraft as the fund being badly positioned for what happens next. 

The market’s kneejerk reaction to dump financial stocks, for example, might have been correct in past crises, but may well prove to be the wrong decision this time. The reality today is banks have 3-4 times the capital that they had in 2008, excess liquidity and the European Central Bank monetary policy responses have been immediate, and they are part of the solution in supporting the real economy. It’s a very different situation to the one back in 2008. 

Before COVID-19, we often had the impression that we were preaching in the wilderness when talking about a real shift coming through towards the meaningful use of fiscal policy in Europe. Now, there is so much fiscal being used as well as enhanced and accelerated monetary policy across the globe that is hard to know where to start. Clearly, this seismic policy shift is there for a (very bad) reason, but it is there nonetheless and will have a substantial impact on the direction and make- up of markets from here. 

Currently there is still a lot of uncertainty in the air. What is clear is that the valuations of many of the stocks we own are already very depressed. Until there is more certainty – probably when new infections peak – volatility is likely to remain at extended levels. The key is to have a fund which can navigate the volatility today but can capitalise when the recovery comes. We trust the changes we’ve instigated have the potential to deliver on both. 

Investment Risks

The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested. 

The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund. 

Although the Fund invests mainly in established markets, it can invest in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. 

Important Information

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. 

This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities. 

For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown. 

Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on- Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.