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 second quarter of 2019. Despite gaining further positive ground the market proved volatile, failing to sustain the strong rally we saw in the first quarter of the year. A resurgence in US-Sino trade concerns led markets lower in May, although increasingly positive language from the US Federal Reserve and an improved outlook for trade tensions allowed the market to recover lost ground during June. Oil prices were weaker over the quarter. Having risen sharply in the opening months of 2019, the price of Brent crude oil peaked at US$74 per barrel in April, before falling back to US$60 a barrel in June.
At home, domestic politics continued to dominate the agenda. In April, the European Union granted an extension to Article 50 following months of heightened political turmoil. Then in May, Theresa May announced her intention to resign, sparking the beginning of the Conservative Party leadership contest. Against this backdrop the value of the pound drifted lower against international currencies. Having peaked at 1.33 against the US dollar in March, the pound fell to just US$1.25 in June, as the Bank of England cut its economic growth forecasts.
Economic data released over the period proved mixed. UK retail sales were comparatively lower during April and May compared to 2018. The dip in consumer confidence was compounded by strong data from 2018 where retail sales received a boost from the hot weather and Royal Wedding. Elsewhere, UK car production was 15% lower during May than over the equivalent period in 2018, reflecting a 12th consecutive month of declines. Meanwhile unemployment fell to 3.8% in the three months to the end of March, the lowest rate recorded since 1974.
In the three months to the end of June 2019, the fund delivered a total return of -2.2% versus 3.3% 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 3.8%.*
Past performance is not a guide to future returns.
Over the quarter a number of the portfolio’s holdings traded weakly in the absence of any meaningful company news. The portfolio’s tilt towards UK domestic revenues continued to provide a negative contribution to relative returns. Within this investment theme, holdings in Drax and Stobart Group were notable detractors. Utilities firm Drax traded weakly throughout the quarter, whilst the share price of Stobart Group fell sharply in May. The company announced a delay to the release of its full year results, citing the impact of the disposal of its airline business on company resources. Shares recovered some ground following the subsequent release but ended the quarter lower overall.
Within the portfolio’s internationally-orientated stocks, the most notable impact on performance was provided by the tobacco sector. Holdings in British American Tobacco and Imperial Brands provided a negative contribution to performance, whilst the fund’s relative overweight position in the sector compounded the impact of negative returns on relative performance. The sector proved weak on revived concerns around regulation, whilst the market’s expectation of faster sales growth of next generation technology proved a weight to the share price of Imperial Brands.
Despite the fund’s relative underperformance over the quarter, there were a number of holdings that provided a strong positive contribution to returns. AJ Bell was the largest contributor to performance. The investment platform’s share price rose very strongly in the first half of the period as the company issued a better-than-expected trading update for the second quarter. Other notable contributors included BCA Marketplace. The owner of webuyanycar.com confirmed that it was in advanced takeover discussions with a private equity firm during June. Other notable contributors included biotechnology stocks PureTech Health, Evofem Biosciences and Leaf Clean Energy.
|Performance (% growth)*
||Invesco Income Fund (UK)
||FTSE All-Share index
||IA UK All Companies sector
Past performance is not a guide to future returns.
|Standardised rolling 12 month performance (% growth)*
*All data is as at 30/06/19, 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
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-facing stocks have generally performed poorly and remain undervalued relative to the broader market. The fund also has notable exposure to Financials, notably companies where growth is not correlated to traditional business cycles. Meanwhile the portfolio manager maintains meaningful exposure to global industries, namely oil and tobacco, which typically yield higher than average dividends, whilst trading at historically low valuations.
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. The fund manager seeks to invest in companies that have the potential to achieve both capital growth and sustainable growth in income over time. In investing across the market-cap spectrum, the fund manager seeks to diversify the risk profile of the fund and secure diverse sources of income for the fund. He 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.
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.