Invesco Income Fund (UK) Q4 2019 review

Posted by Guest in Fund and industry updates category on 31 Jan 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 provided a positive return during the fourth quarter of 2019. However, this data masks periods of significant volatility. The market fell very sharply at the beginning of October and the FTSE 100 index posted its worst single day return in more than three years on renewed concerns around economic growth. However, the market recovered losses throughout the remainder of the month and November, before rallying mid-December on confirmation of a majority win for the Conservative party in the UK General Election.

The value of Sterling appreciated against international currencies over the quarter, peaking at a nine-month high of US$1.33 mid-December on the election result. The Bank of England’s (BoE) Monetary Policy Committee voted to hold the UK base interest rate at 0.75%. All seven of the UK’s major lenders passed the BoE’s annual stress test, suggesting that the UK financial system is robust enough to withstand a financial crisis. The Chancellor of the Exchequer appointed Andrew Bailey, the Head of the Financial Conduct Authority, as the new Governor of the BoE. Bailey will assume the role from Mark Carney in March 2020.

Economic data released during the period painted a disappointing picture. UK retail sales for November fell despite consensus expectations of an increase and the UK economy also contracted more than expected.

Performance review

In the three months to the end of December 2019, the fund delivered a total return of 4.6% versus 7.0% by the reference benchmark, the IA UK All Companies sector.

Past performance is not a guide to future returns.

The portfolio’s exposure to domestically-orientated stocks provided a significant contribution to performance over the quarter. Holdings in Legal & General, Derwent London, Breedon Group, Next and Cranswick rallied on political developments and the corresponding appreciation in Sterling.

At a stock level, PureTech Health provided the largest contribution to performance over the quarter. The company’s share price rose sharply mid-November on news that Karuna Therapeutics – an affiliate company - had successfully completed the Phase 2 clinical trial of its medicine to treat acute psychosis. Elsewhere, the portfolio’s holding in British American Tobacco also supported returns. The company released a supportive trading update in November, whilst the shares were further boosted by more accommodative language from the US Food & Drug Administration. Other notable contributors included easyJet.

Despite the fund’s positive return, a number of holdings performed poorly over the quarter. BP released third quarter results and confirmed that long-standing CEO Bob Dudley would retire in Q1 2020.

Within the portfolio’s financials, holdings in Burford Capital, Crystal Amber, ITWP Acquisitions and Non-Standard Finance traded weakly. Other notable detractors include Stobart Group. 

Performance (% growth)* Invesco Income Fund (UK) IA UK All Companies sector
3 months   4.6   7.0
6 months   4.8   8.2
1 year   6.9  22.4
3 years   0.5  24.1
5 years 12.9  44.3
Standardised rolling 12 month performance  (% growth)* 31.12.14 - 31.12.15 31.12.15 - 31.12.16 31.12.16 - 31.12.17 31.12.17 - 31.12.18 31.12.18 - 31.12.19
Fund  9.2   2.9   5.3 -10.6  6.9
Reference sector 4.6 11.2 14.0 -11.1 22.4
 Past performance is not a guide to future returns.
*All data is as at 31/12/19, 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 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

2020 has all the promise of being a good year for UK equities. As we progress through the year it is my belief that UK domestic equities stand to gain from clarity around our future trading relationship with the European Union, a sustained recovery in the value of Sterling and the re-emergence of our domestic market as a place of opportunity for international investors. Accordingly, the portfolio remains well-invested in domestically-exposed shares, positioned to take advantage of this perceived mispricing.

However, the near-term performance of the UK stock market is likely to be determined by some of the same macroeconomic and political forces which have dominated the past few years. The above-mentioned conditions are likely dependant on the progress made in securing our future trading relationship with the European Union. 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.

 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.