Invesco Income Growth (IVI) aims to generate quarterly income, and capital growth, superior to the wider UK stock market. Managed by Ciaran Mallon, IVI also targets growing capital and dividends in real (i.e. inflation-adjusted) terms, and is viewed by the manager as very much a ‘core’ UK equity income product; as such, he seeks to avoid significant stylistic or macroeconomic tilts within the portfolio. IVI presently yields c. 4.3% (as of 28/02/2020) and has increased its dividend every year for 22 years.
The trust’s focus is on disciplined bottom-up stock research, identifying companies with a strong track record of capital allocation. As we discuss in the Portfolio section, the trust has a bias to high-quality businesses with strong balance sheets and good management, operating in industries with high barriers to entry and generating sustainable profit margins. It is a concentrated portfolio across circa 40-50 holdings, with very low turnover.
Compared to its Invesco UK Equity peers, IVI tends to have greater exposure to large-cap equities and sectors, such as utilities, which generate reliable dividend streams. Gearing is another differentiator, the level of which is primarily driven by stock-specific considerations, though wider market momentum is also considered.
IVI’s discount has narrowed significantly in recent months following improved NAV returns, but at c. 9.7% (as of 28/02/2020) is still wider than the weighted peer group average. In recognition of this, the board has announced that a continuation vote will be held in 2020.
The narrowing of the discount has helped to generate notable share price outperformance over the past 12-months. Historically, as we detail in the Performance section, IVI has been successful in mitigating market downside during corrections.
IVI is seen by its manager as a core UK equity income product, and fits this profile well. A track record of 22 years of dividend increases is a notable achievement, and the decision to continue to build revenue reserves in recent years should support continued growth.
The manager’s preference for running a ‘safety first’ equity portfolio will likely, at times, see IVI lag in particular circumstances, such as a sharp economic upswing. This seems pertinent just now, as if markets see substantial stimulus measures in the coming months in the wake of a coronavirus-driven economic ‘sudden stop’ or a significant slowing in growth, this could prove a headwind to relative returns if this boosts more cyclical areas of the market.
However, IVI is not about maximising upside or about business-cycle adjustments to the investment profile. Instead, it focuses on long-term compounding of both income and capital returns from high-quality businesses. On this basis, short-term fluctuations in relative performance are of less concern than consistent growth in the dividend. Furthermore, having historically displayed superior NAV resilience in market corrections, this could complement a more ‘punchy’ UK equity strategy.
The persistence of the discount remains of concern. While it has narrowed significantly on both an absolute and relative basis, the relative discount compared to the peer group average is broadly in line with the historic average. The trust faces a continuation vote this year.
|Has normally mitigated downside during market corrections||May lag in strongly style or macro driven market rallies|
|Strong track record of dividend growth which remains backed by revenue reserves||A significant sterling rally would likely prove a headwind relative to peers, if not market|
|Discount remains wider than that of peer group||Discount has been consistently wider than that of the peer group|