Invesco Select: UK Equity 11 July 2023

Invesco Select: UK Equity’s (UK:IVPU) defining characteristic, in our view, is the managers’ strategy of focussing on companies that are good quality, with sound fundamentals and strong cash generation. By carefully selecting stocks with strong liquidity, the managers remain active and maintain a portfolio of their highest-conviction ideas, across a range of sectors.

With plenty of diversity amongst underlying holdings and their respective markets, the managers believe that a unifying feature of all their holdings is that they exhibit strong or improving returns, have proven management teams, strong balance sheets and are trading at attractive valuations. The team aim to look past stock-market noise and focus on long-term prospects. They believe that the companies they have selected have the potential to strengthen their competitive positions in the year ahead, irrespective of the economic and market regime that will develop.

Echoing the willingness to take a long-term view, the board has a policy of contributing capital to support dividends. The resulting freedom engendered by the board enables the managers to invest for the highest total returns possible. In our view, as we discuss in the Dividend section, this feature also makes the trust a potential source of all-weather equity income.

IVPU has had a co-manager setup since April 2021. Ciaran Mallon joined James Goldstone on the trust, having worked closely together before on the same team. As we discuss in the Performance section, initially IVPU delivered good outperformance of the benchmark and peers. However, the volatility of 2022, and subsequently, has been challenging. We highlight that not only has the FTSE 250 Index underperformance of the FTSE 100 Index been a headwind for IVPU, but also Gearing. We note that James and Ciaran achieving a three-year performance track record together is less than a year away.

IVPU harnesses many of the advantages which make investment trusts excellent vehicles for long-term investors, including Gearing. James and Ciaran have absolute discretion to invest for the long term, aiming to deliver good total returns through stock selection while not being exposed to a narrow set of industry or style-specific drivers.

With the managers being purely fundamentals-focussed, shareholders must be prepared for the NAV to not necessarily closely track the benchmark (see Performance). Whilst James and Ciaran initially outperformed strongly since becoming co-managers, they suffered a period of underperformance last year. Our analysis shows that since the dramatic fall in UK equities in September 2022, IVPU has broadly performed in line with UK equities on a relative basis.

With a structure and strategy that enables the managers to invest in the best opportunities for the long term, at times embracing lower-yielding opportunities and/or mid and small-caps, with a Dividend yield of 4.6%, IVPU is likely to complement other UK Equity Income trusts and funds. However, since Russia’s invasion of Ukraine, IVPU’s discount has widened significantly. In our view, it is hard to identify a tangible catalyst for the discount to narrow in the short term, other than if the board started buying shares back. However, as we discuss in the Discount section, once market conditions become calmer again, the fundamental attractions of IVPU might be better recognised by the market. There is potential for the discount to NAV to narrow on a sustained basis, at least in line with the peer group average. The current discount to NAV of 15.8% compares to the peer group’s weighted average discount of 4%.