The UK equity market rose strongly through the final quarter of 2017, a period characterised by inflation, improving global economic growth and rising commodity prices. At the start of November the Bank of England implemented the first UK interest rate rise in a decade as the central bank’s Monetary Policy Committee (MPC) voted to increase the UK interest rate to 0.5%.
Economic data provided mixed signals for the UK economy and inflation remained elevated. The UK manufacturing sector performed strongly in the fourth quarter of 2017 and Black Friday sales boosted UK retail sales in November.
The oil price rose strongly through the quarter, initially on expectations that members of the Organisation of the Petroleum Exporting Countries (OPEC) would extend the terms of their agreement to cap output. Metals prices also rallied, particularly copper, which has risen more than 30 per cent through the course of 2017. In aggregate, the upswing in commodity markets contributed to the UK market’s positive momentum into the end of the year, with the FTSE All-Share index pushing to new all-time highs in the final month of the year.
In the three months to the end of December 2017, the fund delivered a total return of 2.0% versus 5.0% by the benchmark FTSE All-Share index (£; total return). The fund’s peer group, the IA UK All Companies sector, rose by an average of 3.9%*.
The major driver of the fund’s underperformance relative to the benchmark throughout the quarter, and indeed for much of 2017, was the portfolio’s zero weighting in the mining sector, notably the absence of Glencore, BHP Billiton and Rio Tinto. This sector continued to rally on the back of rising metal prices, particularly copper.
The fund’s holding in Capita detracted from performance in the quarter; the company’s share price fell on news of a more subdued outlook for its business pipeline. Second-quarter results from TalkTalk Telecom showed higher-than-expected customer loss and a squeeze on profit margins, prompting fears in the market that the broadband provider would be forced to cut its dividend.
The tough environment for UK retailers continued, as Next announced a sharp decline in high street sales and extremely volatile trading conditions. The defence contractor Babcock offset wider concerns that Brexit could weaken demand as it reported £31bn of business in the pipeline. Centrica announced it had lost over 800,000 of its 13 million customer accounts over a four-month period and warned of a “highly competitive” US market.
BP was the top contributor to performance through the final quarter of the year as the oil price continued to rise. BP management have successfully guided the business through the lower pricing environment. British American Tobacco (BAT) also contributed positively, issuing an upbeat trading statement. Management forecast continued earnings growth, with full-year sales volumes ahead of industry estimates. Importantly, BAT’s next generation product ‘glo’ has continued to gain market share in Japan, where the company is testing the product’s traction prior to wider distribution.
Other positive contributors included easyJet, which reported a strong set of full-year results, Burford Capital, rising strongly following share price weakness in September and BTG, advancing on news that its drug Zytiga's EU approval would be extended to include newly diagnosed prostate cancer patients with metastatic disease.
|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 & Outlook
|Standardised rolling 12 month performance (% growth)*
||30.12.12 - 30.12.13
||30.12.13 - 30.12.14
||30.12.14 - 30.12.15
||30.12.15 - 30.12.16
||30.12.16 - 30.12.17
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 and 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 return to fair value for sterling.
Ultimately, his objective is to invest, with sensible diversification, where he sees the prospect of making money in absolute terms – either driven by growing dividends or from companies that can improve or transform their financial prospects regardless of the shifting economic weather.
*All data is as at 31/12/17, 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.
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.