Invesco Select: UK Equity (IVPU) trust's shares merged with Invesco Income Growth (IVI) at the end of April this year. As a result, the combined entity now has critical mass, but more significantly has a new management team with Ciaran Mallon having joined as co-manager with James Goldstone. It is a new constituent of the UK Equity Income sector.
IVPU is one of four share classes which sit under the umbrella of Invesco Select Trust (the others offering global equities, multi-asset and cash exposures). We discuss the innovative features of this structure in Discount.
Both managers bring differing but complementary views on stocks and sectors, but they share equal responsibility for every stock in the Portfolio. Ciaran has a strong focus on company fundamentals, whilst James has historically placed greater emphasis on valuations. They believe that this diversity of thought strengthens the investment process, given their objective is to have a relatively balanced portfolio in terms of growth and value exposures. With two co-managers working closely together to pick stocks, IVPU’s portfolio now includes 16 stocks that were not held in the portfolio previously.
The overall aim is to ensure the portfolio generates strong total returns through stock selection, but not be exposed to industry specific or a narrow set of drivers. The pair aim to use the investment trust structure to have a slightly more concentrated portfolio than their open-ended funds (40-50 holdings), fewer constraints on stock selection, and to use gearing fairly consistently (see Gearing).
As a package, IVPU offers a highly differentiated exposure to UK equities, which many commentators believe look cheap when compared to other equity markets. The early results from the change in management arrangements (in terms of outperformance of the benchmark) are encouraging.
We believe that having two fundamentals-based managers combine their efforts on IVPU is a strong positive for shareholders. The result is a stock picking, high conviction portfolio, focussing on companies of all sizes in the UK and a balance between growth and value. Additionally, the trust structure gives the managers a broader toolkit to enable them to deliver performance from stock picking. With complementary skill-sets, the managers should be in a strong position to deliver on the trust’s objectives for shareholders: attractive total returns from a valuation sensitive investment process and a good level of income.
IVPU’s historic dividend yield is 3.7%. The board can and does use capital to maintain the payments, as the dividend is not fully covered. Paying from capital has enabled investors to have a high degree of confidence on the dividend distribution each year. Equally, it allows the co-managers to invest for the best total returns possible without the pressure to hit a particular income target.
IVPU offers an interesting way to gain a balanced exposure to UK equities. The discount is marginally wider than the three-year average, and if the co-manager’s stock picking success continues, then we might expect the discount to narrow closer to NAV.
|A highly attractive yield from a multi-cap balanced exposure to the UK
||UK could remain undervalued relative to peers for a protracted period
|A portfolio of attractively-priced stocks with rebound potential
||Gearing can exacerbate the downside (as well as enhance the upside)
|Limited discount risk relative to peers
||Co-management set-up has only been in existence for c. 12 months