After rising strongly into the close of 2017, the UK equity market delivered negative returns over the first quarter of 2018, as sterling rallied against the US dollar. Market weakness was largely fuelled by upward revisions to US interest rates and a corresponding increase in government bond yields, coupled with growing fears of a trade war between the US and China.
Protectionist rhetoric from President Trump over the period fuelled global market unease, which brought the largely international constituents of the FTSE 100 under pressure. The on-going strength of sterling versus the US dollar, helped by better news on the Brexit negotiations, also put pressure on overseas earnings.
Expectations that the Bank of England’s Monetary Policy Committee would increase the interest rate at its May meeting continued to grow, with sterling futures contracts (which hedge against interest rate moves over three months) hitting their highest trading point since July 2007 mid-March – a sign that the market believes a rate change is imminent. Confidence was encouraged by the US Federal Reserve’s decision to raise US interest rates during the period.
Figures announced towards the end of March showed UK wage growth rose at the fastest rate for more than two and a half years during the three months to January, though it trailed inflation. The 2.6% increase was in line with expectations.
In the three months to the end of March 2018, the fund delivered a total return of -7.8% versus -6.9% by the benchmark FTSE All-Share index (£; total return). The fund’s peer group, the IA UK All Companies sector, fell by an average of -5.8%. *
The fund’s underperformance relative to the benchmark throughout the quarter was largely driven by the performance of specific stocks issues. Outsourcer Capita issued a profit warning in January, announcing plans for a rights issue of up to £700 million and the suspension of its dividend “until the company is generating sustainable free cash flow”. The announcement, which was accompanied by a strong message from management on the need for change within the business, prompted a sharp fall in the company’s share price.
Another area of weak performance came from the portfolio’s tobacco holdings – British American Tobacco (BAT) and Imperial Brands – which came under pressure from the recent strength of sterling versus the US dollar. Results from BAT confirmed headwinds for headline earnings from adverse foreign exchange moves, overshadowing the news of strong growth in next generation products and a 15% increase in the dividend. Other notable detractors included Card Factory, which confirmed margin pressures from rising wages and input prices, Royal Dutch Shell and BP.
There were a number of portfolio holdings which contributed strongly to performance over the quarter. The most notable of these was the litigation finance company Burford Capital, which continued to provide strong performance; shares jumped 28% on news that its profits for 2017 had more than doubled from the previous year. The firm also confirmed a 20% raise in its dividend for 2018.
Next proved resilient despite the negativity surrounding the UK retail sector at present. In January, the company posted better-than-expected Christmas trading results, and full-year results released at the end of the quarter were in line with expectations; the firm reported rising online and overseas sales. Easyjet was another strong performer over the quarter. The market reacted warmly to reports of rising sales and revenues for the final quarter of 2017 - a period which saw the bankruptcies of Monarch, Air Berlin and Alitalia provide some tailwinds to the company in a highly competitive market.
|Performance (% growth)*
||Invesco Perpetual High Income Fund
||FTSE All-Share index
||IA UK All Companies sector
Past performance is not a guide to future returns
Strategy and Outlook
|Standardised rolling 12 month performance (% growth)*
||31.03.13 - 30.03.14
The portfolio manager believes that the negative sentiment towards sterling and domestic companies since the EU Referendum will continue to unwind and has selectively increased the fund’s UK domestic exposure. He also sees value in the pharmaceutical sector, where he believes that pipeline risk is overstated, as well as in the oil and tobacco sectors. He retains a preference for choosing different stocks that aren’t linked in their performance – seeking to limit downside through what may prove to be more difficult markets and a potential reversion to fair value for sterling.
The 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 and to re-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 extreme momentum and somewhat irrational market pricing, it is vital that he remains rooted in the fundament investment thesis which has served him well historically – and so he continues to do so.
*All data is as at 31/03/18, 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. Benchmark index information is source: Thomson Reuters Datastream, total return, Sterling. The benchmark index is the FTSE All-Share index.
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.
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Invesco Perpetual is a business name of Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley on Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
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