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.
The UK equity market provided a flat return during the third quarter of 2019. However, this data masks periods of significant volatility as markets were driven by concerns of a slowdown in global economic growth and the fluctuation of US-Sino trade tensions. The market rose during July, before falling very sharply at the beginning of August. Global equity markets were spooked by a reignition of US trade war rhetoric. The UK equity market rose steadily through September to recover some losses, ending the period flat overall.
The value of Sterling versus international currencies remained weak during the period. Sterling fell to just US$1.20 in mid- August, as the UK Government sought to prorogue parliament, further elevating fears of a ‘no-deal Brexit’. The Bank of England voted twice during the quarter to hold the UK base interest rate at 0.75%. Commodity prices proved volatile during the quarter. Brent crude oil fluctuated between US$56 and US$69 per barrel, whilst gold prices reached a five-year high in August.
Economic data released during the period showed a slowdown in economic growth during the first half of 2019, a result of weaker business investment. However, employment remained robust in the first half of the year, with unemployment below 4%.
In the three months to the end of September 2019, the fund delivered a total return of -0.3% versus 1.1% by the reference benchmark, the IA UK All Companies sector.
Past performance is not a guide to future returns.
The main detractor to performance was Burford Capital. At the beginning of August, the litigation financer was the subject of a “short-attack” from a US research firm. The report prompted a very material fall in the company’s share price. Burford Capital robustly defended itself against the accusations and later announced a series of corporate governance enhancements to soothe the market. The company’s share price recovered some ground but remained significantly below the pre-fall level.
Other significant detractors included Amigo Holdings. Shares traded weakly throughout the quarter, impacted by fears of heightened regulatory interest in the guarantor-backed loan sector. Then in August, the company released results for the first quarter that were significantly below market expectations. This, coupled with the news that Amigo would pursue a revised strategy to target new – instead of repeat – lending, prompted a sharp fall in the company’s share price.
Meanwhile the portfolio continues to be weighted towards domestic value stocks. Capita and Next were among the best performing stocks within this theme over the quarter. Next released a strong trading update in July, raising its full year profit forecast. The retailer later released half-year results in September, which confirmed double-digit growth in online sales, whilst management reaffirmed its full-year guidance. Capita also traded well throughout the quarter, as the market became more optimistic of the progress made in its turnaround strategy.
Within the fund’s more internationally-focused investments, Babcock and easyJet were key contributors. Babcock’s share price traded well throughout the quarter, whilst easyJet received a boost in September following the collapse of rival Thomas Cook. However, the absence of certain highly-rated FTSE 100 stocks weighed on performance relative to the wider market.
Meanwhile the portfolio’s tobacco holdings remain an important theme. Performance was mixed over the period, however the manager retains confidence in the outlook for the sector, which yields significantly higher than average dividends and remains attractively-valued by the wider market.
|Performance (% growth)*
||Invesco High Income Fund (UK)
||IA UK All Companies sector
Past performance is not a guide to future returns.
|Standardised rolling 12 month performance (% growth)*
||30.09.14 - 30.09.15
||30.09.15 - 30.09.16
||30.09.16 - 30.09.17
||30.09.17 - 30.09.18
||30.09.18 - 30.09.19
*All data is as at 30/09/19, Fund performance data source: Lipper. 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. Fund performance is in Sterling, inclusive of reinvested income and net of the Ongoing Charge and portfolio transaction costs. Sector average performance is calculated on an equivalent basis. The sector is the IA UK All Companies NR sector. This 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 and outlook
The performance of the UK stock market is likely to be determined by the same macroeconomic and political forces which have dominated sentiment for the past few years. The political uncertainty in many regions has been especially difficult to navigate recently and has been a major headwind to fund performance given the extreme polarisation of company valuations that has emerged. This differential between highly-rated global stocks and depressed, domestic, economically-sensitive shares is substantial. It sits at a multi-year high and offers the most glaring opportunities within the UK stock market. The portfolio is positioned to take advantage of this perceived mispricing.
The extent of this mispricing is perhaps most clearly highlighted by the difference between dividend yields and corporate bond yields over the past ten years. Over this period, dividend yields have remained broadly flat, whilst corporate bond yields have declined markedly. It is also very likely a significant factor behind the strong re-emergence of Mergers & Acquisitions activity in recent months. The range and breadth of deals witnessed from industrial and especially financial buyers is clear evidence that there is value available in UK listed companies financed by accessing the debt markets at very attractive yields. The portfolio has been a beneficiary of such deals over the past year.
In recent weeks sentiment within the market has been extremely volatile as perceptions around a political deal have shifted. This has resulted in a marked change in the composition of the stock and sector leadership, which has favoured the current positioning within the portfolio. A sense of relief and clarity regarding the outcome of the negotiations with Brussels is clearly a benefit to the performance of the UK stock market and especially this portfolio. The level of pessimism which is discounted in the valuations of many holdings is anticipated to result in revaluation opportunities from current levels as and when the political fog clears. The portfolio continues to seek to invest in companies that have the potential to achieve both capital growth and sustainable growth in income over time. The fund manager continues to evaluate the holdings in the portfolio and to seek the best opportunities to create a diversified, sustainable flow of dividend income that can grow over time.
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 invests in smaller companies which may result in a higher level of risk than a fund that invests in larger companies. Securities of smaller companies may be subject to abrupt price movements and may be less liquid, which may mean they are not easy to buy or sell.
The fund may invest in private and unlisted equities which may involve additional risks such as lack of liquidity and concentrated ownership. These investments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that any investments in private and unlisted equities do not materially alter the overall risk profile of the fund.
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.
As one of the key objectives of the fund is to provide income, the ongoing charge is taken from capital rather than income. This can erode capital and reduce the potential for capital growth.
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.
: Willis Owen do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser. The views and opinions contained herein are third party and may not necessarily represent views expressed or reflected by Willis Owen.