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UK equity markets provided a negative return in the final quarter of 2018. The significant volatility witnessed during the period was driven by concerns around geopolitical factors such as the escalating trade war between the US and China, rising fears of a global economic slowdown and declining oil prices. Persistent Brexit uncertainty also continued to weigh on sterling and sentiment toward domestic equities.
The UK and EU’s negotiations reached critical stages in the final few months of the year. The value of sterling versus the US dollar and euro continued to act as a barometer for the perceived success of negotiations. The UK Government succeeded in agreeing a withdrawal agreement with the European Union’s negotiating team, which was later ratified as acceptable by all EU nation states. Consequential gains in sterling were short lived however, as the Prime Minister suffered a wave of high profile resignations from her cabinet and public calls for her to step-down from office, due to the terms of the deal. In December the Prime Minister delayed Parliament’s vote on the deal, fuelling fears of a no-deal Brexit scenario. The news saw the sterling fall to a twenty-month low versus the US dollar.
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain interest rates at 0.75 per cent during the period. Economic data released during the quarter showed that UK wage growth reached 3.3% in the three months to the end of October 2018, the fastest pace in a decade. Meanwhile, unemployment reached just 4%.
In the three months to the end of December 2018, the fund delivered a total return of -9.3% versus -10.3% 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 -12.5%. *
Despite the fund’s negative return, there were a number of holdings that provided notable positive contributions to performance over the quarter. The largest contributor was AJ Bell. The investment platform successfully completed its initial public offering (IPO) in December, listing for the first time on the London Stock Exchange. AJ Bell’s share price subsequently rose more than 30% in the opening hours of trading, with the company’s shares continuing to trade strongly into period end.
The fund’s holding in BTG also provided a significant contribution to performance. The healthcare firm’s share price rose sharply in November on news that it had accepted a takeover bid from US biopharmaceutical firm, Boston Scientific.
Other notable contributors included BCA Marketplace, which released interim results in November that showed growth in excess of analyst forecasts, as well as BT Group and Raven Property.
Conversely, the fund’s holdings in the tobacco sector, namely British American Tobacco, and to a lesser extent Imperial Brands, weighed on returns over the quarter. The companies’ share prices fell following news reports that the US Food & Drug Administration (FDA) is seeking a ban on menthol cigarettes.
Ultimately the fund manager’s view remains that the tobacco companies’ product innovation should continue to provide a reliable source of income, while next generation products have the potential to deliver a significant new revenue stream.
Elsewhere the fund’s holdings in the oil & gas sector, namely BP and Royal Dutch Shell, weighed on returns. Over the period Brent crude oil prices fell from more than US$85 per barrel at the start of October, to lows of US$51 per barrel in December. Against this backdrop, the share prices of UK listed oil companies traded weakly.
Other notable detractors included Stobart Group, Next and Aviva.
|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 31/12/18, 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.
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.