Invesco Perpetual Income Fund Q1 2018 review
Posted by Guest in Fund and industry updates category on 20 Apr 18
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 -8.0% 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 main driver of the fund’s underperformance relative to the benchmark was the portfolio’s holding in Capita. The outsourcer 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.
The recent strength of sterling versus the US dollar also put pressure on the large proportion of FTSE 100 company earnings that are derived overseas. Results from British American Tobacco confirmed headwinds for headline earnings from adverse foreign exchange moves, overshadowing news of strong growth of next generation products and a 15% increase in the dividend. Imperial Brands, another holding in the tobacco sector, likewise detracted from performance.
A number of holdings provided positive returns to the portfolio, including easyJet, Next and Burford Capital. Despite the negative outlook for the UK Retail sector overall, Next posted a Christmas trading update which exceeded market expectations. The company’s full year results were in line with guidance and it reported rising online and overseas sales. Litigation financer Burford Capital continued to provide strong performance, with shares jumping 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. Low-cost airline easyJet bolstered performance, as the market reacted warmly to its report 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.
Other notable contributors to performance included Derwent London, Beazley and Provident Financial Group (PFG). PFG enjoyed a sharp rise in its share price following news that it had reached resolution in the FCA investigation into ROP (repayment option plan) within Vanquis Bank for “failure to adequately disclose potential charging of interest on ROP charges”. The company also announced it would resume dividend payments this year.
|Performance (% growth)*
||Invesco Perpetual 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)*
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.
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.