Jonathan Brown and Robin West are fundamental stock pickers, with a strong valuation discipline. Within their peer group, they aim to achieve top quartile performance with below average volatility. As we discuss in the Returns section, they have consistently achieved this aim – largely through the application of the same investment process year after year, cycle after cycle.
Jonathan and Robin try not to take macro views, and they rely on fundamental bottom-up stock analysis. In terms of market-cap exposure, the trust tends to sit in the middle of the pack relative to peers – neither particularly heavily weighted to mid-caps nor to micro caps. The companies that the managers tend to invest in have both 'quality' and 'growth' characteristics. They look for businesses that have the potential to double in size over the next five years, and in typical Invesco Perpetual style, hold them for the long-term – their typical annual turnover is c. 25%.
The trust has now achieved five consecutive years of outperforming the benchmark. So far in 2019, IPU is ahead of the benchmark by 9.5% (to 2 October), and therefore on track for the sixth straight year of outperformance. The team has a preference for finding high quality businesses that are growing revenues and profits, and likes to buy them at what it sees as the 'right' valuation. When we spoke to the managers recently – consistent with their usual pattern of activity – they reported that they have been selling down more highly rated companies and recycling capital into smaller, less expensive stocks. As a result, with worries about growth faltering, IPU has been better protected and maintained its lead over the benchmark and peers.
With a yield of 3.6% on a historic basis, IPU pays amongst the highest level of dividend yield in the UK smaller companies sector. It is important to note that this yield is not achieved by the managers investing in companies which themselves provide a higher yield, but because the income from the portfolio is supported by capital reserves.
The managers believe that their portfolio of good quality businesses with multi-year growth trajectories will stand them in good stead. Jonathan believes that sticking to their principles is the only way to ride out the current difficult political backdrop.
We believe that IPU’s attractions are many. The managers represent a dependable team with an enviable track record of achieving peer group-beating returns through the cycle, but with below average volatility. They apply their investment process consistently, and the valuation-driven approach means that shareholders can be reassured that the team won’t lose its head when others are losing theirs in very momentum driven markets.
At the same time, investors stand to benefit from the peer group-topping yield of 3.6%. We believe that it is reassuring that this higher income is being delivered without the managers having to tilt their process and favour income generation, potentially at the cost of total returns.
The board’s negotiation to drop the historic performance fee will result in a slightly higher OCF, but overall should result in higher net returns to investors. At any rate, the fee pales into insignificance when compared to the trust's longer-term outperformance of the benchmark, and the five-year alpha score of 5.9% per annum.
IPU might be an interesting way to benefit from a Brexit bounce (if it happens). Thanks to the managers’ ‘valuation- aware’ process, currently around 60% of the portfolio is domestically focused. The managers also point out that small caps have underperformed large caps for five straight years now – an unusually long period by historical standards. Assuming we get anything other than a hard Brexit, it’s not hard to see small-caps outperforming once again, and the IPU teams seem well equipped to deliver on this basis.
|Consistent investment process delivers strong results through cycle, with lower volatility||Dividend paid from capital may not be tax efficient for some investors|
|Highly stable and experienced team - currently top quartile in investment trust peer group||Trades at a premium rating to peers, and narrow discount in absolute terms|
|Attractive dividend yield||Portfolio trades at a significant P/E premium to benchmark|