Invesco Income 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

The UK equity market fell in the first quarter, posting its biggest quarterly drop for more than three decades as the global economic costs of the Covid-19 pandemic continued to mount. Extreme levels of volatility were witnessed with large swings in prices on a daily basis. Travel stocks were among the worst hit as the virus spread across Europe and lockdown measures were put in place.

At the start of the quarter, prior to the pandemic, employment growth in the UK looked set to remain firm, wages were set to increase further, growth in government spending had picked up and investment spending was strengthening. On this basis, overall rates of economic growth were expected to accelerate throughout the year.

As the scale of the pandemic unfolded, governments around the world launched unprecedented stimulus measures in March, while central banks cut interest rates to support economic activity in the coming months. The strength and depth of the measures announced by the Chancellor and the Bank of England will provide material support to employment income and bank lending to the economy.

Given the extraordinary events witnessed in recent weeks, some companies have already announced the suspension or delay of dividends, and some are refinancing to ensure that they have sufficient liquidity to see them through the crisis. Additionally, some company boards have also announced cuts to executive pay. On the last day of March, the UK’s biggest banks agreed to cancel their dividends to further strengthen their balance sheets. Twelve years on from the global financial crisis they are part of the solution supporting lending to households, businesses and large corporates.

Performance review

In the three months to the end of March 2020, the fund delivered a total return of -35.4% versus -28.0% by the reference benchmark, the IA UK All Companies sector.

Past performance is not a guide to future returns.

Looking at the four main themes within the fund: UK Domestic Value, International Growth Opportunities, Tobacco and Non-Correlated Financials, it follows that companies within the UK Domestic Value theme (Capita, Next) which are more heavily exposed to sterling weakness, have tended to underperform relative to the reference benchmark. EasyJet and IAG also saw significant share price falls. The measures to contain spread of Covid-19 have had a significant impact on the share price of fashion retailers and the tourism and leisure industry (which includes air travel).

The better performing stocks were those more exposed to international earnings (including Tobacco and Oil) which are relative beneficiaries of $US strength (British American Tobacco, Total, and Royal Dutch Shell). Investment platform AJ Bell saw strong share price growth, and online trading platform PLUS500 was also up.

Performance (% growth)* Invesco Income Fund (UK) IA UK All Companies sector
3 months   -35.4  -28.0
6 months   -32.4  -23.0
1 year   -33.9  -19.2
3 years   -37.2  -14.6
5 years   -32.2    -1.6
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  -2.2 10.5  -6.3 1.3 -33.9
Reference sector -2.5 18.1   2.7 2.9 -19.3
Past performance is not a guide to future returns.

*All data is as at 31/03/20, 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

In recent weeks, it has become apparent that coronavirus, or Covid-19, will have a significant, but in our opinion, temporary, impact on UK economic growth. The restrictions put in place in recent weeks to limit the spread of Covid-19 will naturally have a large impact on a wide range of economic indicators. With around half of private sector output currently subject to severe disruption, and the exit path out of lockdown yet to be determined, the range of possible outcomes for economic activity over the balance of 2020 is much wider than normal. 

As part of its ongoing efforts to mitigate against the impact of the coronavirus outbreak, the UK government has announced substantial measures to support corporate and household cash flow in the coming months. Separately, the Bank of England lowered interest rates further, to 0.1%, and announced large scale asset purchases. The strength and depth of the UK’s economic policy response offers us some reassurance. 

Company earnings estimates have been revised down significantly in recent weeks but have yet to fully reflect the impact of the weakening in economic activity that is likely to materialise in the second quarter. As the effects of the virus start to fade, the measures implemented by the Government and the Bank of England will, in our view, provide the impetus for a resumption of economic growth in the second half of 2020 and into 2021.

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. By investing in an array of small, medium and large companies, the risk profile of the fund is diversified, whilst also benefitting from diverse sources of income. I continue to seek the best opportunities to create a diversified, sustainable flow of dividend income that can grow over time.

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 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. 

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.