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UK equity markets rose during the second quarter of 2018, despite some periods of notable volatility in the latter half of the quarter. In May, fears of contagion from political instability in Italy caused some market weakness, while the escalating threat of a global trade war – fuelled by protectionist rhetoric from President Trump, China and Europe – was the main driver of market weakness towards quarter end. However, overall UK equity markets delivered strong single digit returns, with a spike in the price of Brent crude oil – which peaked at US$80 per barrel in May – and sterling weakness proving the main drivers of positive returns.
The Bank of England’s Monetary Policy Committee (MPC) voted twice during the second quarter to keep interest rates at 0.5%. Weaker-than-expected economic growth for the first quarter – attributed to the “Beast from the East” – shifted consensus expectations against a rate rise in June. Elsewhere, data released in May showed that earnings growth outstripped inflation during the first quarter of 2018, the first time that UK workers have had a rise in real pay in over a year. Indeed, momentum for an increase in August built throughout the second quarter, with improved weather, the Royal Wedding and England’s World Cup performance expected to boost consumer spending.
In the three months to the end of June 2018, the fund delivered a total return of 7.2% versus 9.2% by the benchmark FTSE All-Share index (£; total return). The fund’s peer group, the IA UK All Companies sector, delivered an average of 9.1%.*
BP and Royal Dutch Shell were among the largest contributors to returns over the quarter. Share prices in the integrated oil majors rallied on the back of rising oil prices over the period, whilst share prices in BP were further boosted by the release of strong Q1 financial results. Whilst the portfolio benefited significantly from its holdings in the oil & gas sector, which represent 10% of the portfolio, the relative underweight position versus the FTSE All-Share Index meant that the portfolio did not benefit from the full rise experienced by the market. The portfolio’s exposure to domestic companies also held back relative performance due to the weakness observed in sterling over the period.
The portfolio benefited from its holdings in BCA Marketplace, owner of WeBuyAnyCar.com, which rallied following an unsuccessful takeover bid from private equity company Apax. Despite the well-publicised weakness seen from the UK high street, the portfolio’s holding in Next was one of the largest contributors to performance over the quarter. The company issued a strong trading update towards the beginning of May and, in our view, continues to perform strongly, particularly during a broadly challenging period for retailers. In part this is due to the success of Next’s online operations, which saw an 18% increase in the 14 weeks to May 2018.
Elsewhere the portfolio benefitted from its holding in Babcock, which released its full year financial results towards the end of the quarter. The market responded warmly to news of a 5% dividend increase. Other notable contributors to performance included Drax, Cranswick and Relx. Conversely, the portfolio’s holdings in BTG and Alkermes detracted from performance over the quarter.
British American Tobacco (BAT) provided negative returns to the portfolio over the quarter. In April, the company’s share price fell sharply in response to a muted statement from competitor Philip Morris International (not held in the portfolio) around its own next generation heated tobacco product. The fall in BAT’s share price reflects what we observe to be irrational valuations of the UK tobacco sector and the manager retains confidence in the potential of BAT to return to delivering positive returns to shareholders over the long-term.
Share prices in Provident Financial Group (PFG) ended the quarter lower, despite the release of a positive trading update at the beginning of May, which included news that its Vanquis Bank arm had delivered higher than anticipated profits for the year to end April. Other notable detractors over the quarter included Evofem Biosciences, Thomas Cook and BT Group.
|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
|Standardised rolling 12 month performance (% growth)*
||30.06.13 - 30.06.14
||30.06.14 - 30.06.15
||30.06.15 - 30.06.16
||30.06.16 - 30.06.17
||30.06.17 - 30.06.18
*All data is as at 30/06/18, 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
Strategy and outlook
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 fundamental investment thesis which has served him well historically – and so he continues to do so.
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 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.
: 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.