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 positive return during the first three months of 2019; a stark contrast to the sell-off seen during the first and fourth quarters of 2018. UK and global equity markets rallied on optimism surrounding the US-China trade talks, as well as increased expectations of the US Federal Reserve lowering interest rates. The price of Brent crude oil recovered to US$68 per barrel by the end of March, having fallen to US$50 per barrel in December 2018.
Despite the optimism reflected in headline index levels, political uncertainty persisted at home. The question of the UK’s departure from the European Union continued to dominate the agenda during the first quarter, as the deadline for Britain’s exit from the European Union drew closer. Sterling strengthened against international currencies over the quarter, peaking at US$1.33 and EUR1.17 in March, as the UK secured an extension to Article 50, avoiding a no-deal exit from the European Union.
Amid this sustained political uncertainty, the Bank of England (BoE) cut its UK growth forecast from 1.7% to 1.2% for the year, stating that “the economic outlook [for the UK] will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom.” Meanwhile, in his Spring Statement, the Chancellor of the Exchequer highlighted that the UK economy has been “remarkably robust” since the EU Referendum result.
In the three months to the end of March 2019, the fund delivered a total return of 4.3% versus 9.4% by the reference FTSE All-Share index (£; total return). The fund’s peer group, the IA UK All Companies sector, delivered an average return of 8.9%. *
Past performance is not a guide to future returns.
The fund’s holdings in the Financial Services sector accounted for a significant majority of the fund’s underperformance. IP Group, a developer of intellectual property-based businesses in the life sciences and technology sectors, was the largest detractor to performance over the period. The company’s share price traded weakly during the quarter due to volatility in some of its underlying investments. The fund manager remains confident in the long-term prospects of the company.
Elsewhere in the portfolio detractors included Redde. The car hire and repair services company announced that net sales for 2020 would be lower following an unsuccessful bid to renew a repair/hire contract with a large insurer. The manager supports the company’s focus on securing profitable contracts that will support the long-term viability of the company.
Despite the fund’s underperformance over the quarter, a number of holdings provided a notable positive contribution to returns. British American Tobacco (BAT) provided the largest contribution to performance. The company’s share price rose during the quarter supported by the release of strong results and the surprise resignation of the Head of the US Food and Drug Administration – Scott Gottlieb. The market has considered Gottlieb to be the driving force behind a proposed ban on menthol products, which has been a key headwind for the sector in recent months.
The fund’s holdings in the oil & gas sector also provided a positive contribution to returns during the quarter, notably BP which released better-than-expected profit for the fourth quarter.
Other notable contributors included domestically orientated retailer Next, which issued a positive trading update and solid full-year results during the period and Legal & General, which reported better-than-expected profit for the full year.
|Performance (% growth)*
||Invesco Income Fund (UK)
||FTSE All-Share index
||IA UK All Companies sector
Past performance is not a guide to future returns.
*All data is as at 31/03/19, 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 sector. Reference index information is source: Thomson Reuters Datastream, total return, Sterling. The reference index is the FTSE All-Share index.
Strategy and outlook
|Standardised rolling 12 month performance (% growth)*
The portfolio manager notes that negative sentiment towards sterling and domestic companies since the EU Referendum has resulted in a wide degree of polarisation within the market. Companies with substantial overseas revenues have benefitted from the devaluation of sterling and by contrast, UK domestic stocks have generally performed poorly and remain undervalued relative to the broader market. In the manager’s view, the most attractive opportunities rest within domestic sectors – to which the fund has notable exposure. The fund also has notable exposure to the Healthcare and Financials sector.
The fund 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 the holdings in the portfolio and to seek the best opportunities to create a sustainable flow of dividend income for investors. He believes that in times of irrational market pricing, it is vital that he remains rooted in the fundamental investment thesis which has served him well historically.
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.
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.