Invesco High Income Fund Q3 2018 review

Posted by Guest in Fund and industry updates category on 22 Oct 18

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

Market review

UK Equity markets provided a small negative return in the third quarter of 2018. Headline performance masked notable periods of volatility, with markets making gains in the first two months of the quarter, before selling off in September due to global trade tensions. Despite a rally towards the end of the month on renewed sterling weakness and rising Brent crude oil prices, UK Equity markets failed to recover all lost ground into quarter-end.

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to increase the UK’s base interest rate at its August meeting. The market had widely anticipated the 0.25% rise, as it offers the MPC greater flexibility to pare back interest rates if deemed necessary following the final deal negotiated for the UK’s exit from the European Union. Brent crude oil passed US$82 per barrel in September, driven higher by looming US sanctions on Iran.

In Brexit news the European Union rejected the Government’s Chequers plan, causing the pound to weaken notably against the US dollar and euro on the back of increased fears of a hard- Brexit. Meanwhile the UK government issued the largest public sector pay rise in more than a decade, as the 1% cap on pay increases was lifted for teachers, soldiers, police and prison officers, as well as for NHS doctors and dentists.

Performance review

In the three months to the end of September 2018, the fund delivered a total return of 0.04% versus -0.82% by the reference benchmark FTSE All-Share index (£; total return). The fund’s peer group, the IA UK All Companies sector, delivered an average of -1.08%.*

During the quarter the fund’s performance was supported by its holdings in the financials sector. Most notable was Burford Capital, which provided the largest contribution to performance. The share price rose sharply in July as the company reported strong results for the first half of 2018. Results included a 61% increase in cash generation on the previous period and confirmation that 72% of the guided full-year pre-tax-profit has already been generated.

Elsewhere in financials, the fund benefitted from its holdings in venture capital firm Draper Espirit, non-life insurer Hiscox and Redde. Car services company Redde raised its dividend following double-digit increases in both profit and revenue for the twelve months to end June 2018. Shares in Draper Espirit rose sharply following a positive trading update in July, but performance weakened towards the end of August on news that it has funded Apperio, a disruptor in the legal sector. Hiscox meanwhile benefitted from upward revisions to analyst estimates following strong first-half results released at the end of July. The fund’s performance was also supported by the fund manager’s exclusion of banks, as the sector provided a negative return over the period. The manager has excluded the traditional banking sector from the portfolio due to concerns around regulation which restricts the banks to return capital to shareholders.

The fund also benefitted from its holdings in HomeServe and Drax during the third quarter. Shares in the home emergency repairs business, HomeServe, traded strongly throughout the quarter, following the release of a positive trading update in July. Shares in Drax traded well throughout the period, bolstered by news of new contract wins and supportive analyst updates.

Conversely, the fund’s holdings in Thomas Cook and easyJet provided a drag to overall performance. Shares in Thomas Cook suffered a sharp fall in September on the release of a profit warning. The update cited the impact of weaker trading in the tour operator’s ‘lates’ market (last minute, high-margin holiday sales), after an unusually hot summer across Northern Europe. EasyJet meanwhile warned investors of the impact of rising oil prices on profit forecasts for 2019.

Other notable detractors included British American Tobacco (BAT) and Next. BAT’s shares performed positively for much of the quarter, releasing results in line with estimates for the first half of 2018. The tobacco firm ended the period lower overall however, due to negative momentum in the sector. BAT was further impacted by news that rival Philip Morris International (PMI) intends to sue for copyright infringement over BAT’s flagship cigarette alternative Glo. Next meanwhile was impacted by disappointing second quarter results, which showed total brand sales were below the average analyst estimate.

Performance (% growth)* Invesco High Income Fund (UK) FTSE All-Share index IA UK All Companies sector
3 months   0.0  -0.8    -1.1
6 months   7.2    8.3     8.0
1 year   1.0    6.0     5.6
3 years  13.6  38.5   34.6
5 years  38.0  43.5   45.1
Standardised rolling 12 month performance  (% growth)* 30.09.13 - 30.09.14 30.09.14 - 30.09.15 30.09.15 - 30.09.16 30.09.16 - 30.09.17 30.09.17 - 30.09.18
Fund   12.1  8.1    6.7     5.6    0.8
Reference benchmark    6.1 -2.3  16.8   12.0    6.0
Sector    6.0  1.7  12.0   14.0    5.6
Past performance is not a guide to future returns.

Strategy and outlook

The portfolio manager believes that the negative sentiment towards sterling and domestic companies since the EU Referendum will continue to unwind and has selectively increased the fund’s UK domestic exposure. He also sees value in the financials sector, as well as in the oil and tobacco sectors. He retains a preference for choosing different stocks that aren’t linked in their performance – seeking to limit downside through what may prove to be more difficult markets and a potential reversion to fair value for sterling.

The manager remains convinced that, in a changing global environment, the interests of investors are best served by employing a well-tested investment process which is based on fundamental company analysis and a prudent approach to valuation. He continues to evaluate and re-evaluate the holdings in the portfolio, seeking the best opportunities to create a sustainable flow of dividend income for investors. He believes that, in times of extreme momentum and somewhat irrational market pricing, it is vital that he remains rooted in the fundamental investment thesis which has served him well historically.

*All data is as at 30/09/18, 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. The figures do not reflect the entry charge that may be paid by individual investors. Sector average performance is calculated on an equivalent basis. The sector is the IA UK All Companies sector. Reference benchmark index information is source: Thomson Reuters Datastream, total return, Sterling. The reference benchmark index is the FTSE All-Share index.

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.

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.

Important InformationWillis 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.