Cash and global equity

Invesco Select Trust is one of the more unique investment companies listed on the London Stock Exchange today. The investment trust is comprised of four separate share portfolios, with each one giving investors exposure to a different investment portfolio, using some of the characteristics only available within the listed, closed-end structure.

Investors can switch between the four different share portfolios once a quarter. Doing so means they are able to change the exposure they have, without incurring dealing costs or crystallising a capital gain event - ideal for investments that are not tax sheltered.

The UK equity share portfolio is the largest, and arguably the most well-known, of the four. But that shouldn’t mean investors ignore the remaining three. One of these provides investors exposure to global equities and another holds a mix of fixed-income, equities, and commodities to provide a “balanced” exposure across the different asset classes. The portfolio of the fourth share class is invested in sterling-based debt securities.

That final share portfolio – the Invesco Select: Managed Liquidity (IVPM) portfolio - is not one that investors often pay a great deal of attention to, perhaps because the bulk of its exposure is to short duration debt with an average maturity of one year. This means it’s more suited to those with a conservative outlook and, with interest rates so low over the past decade, it would’ve been unlikely to deliver high returns for shareholders for much of that time.

A more conservative outlook would, however, have served investors well for much of the past year. The confluence of inflation, supply chain problems, lockdowns in China, and instability stemming from the invasion of Ukraine has sent jitters through markets and put substantial pressure on equities prices.

In an inflationary environment, the tendency is to believe that equities or commodities are the best things to hold, effectively because the companies or products in question can adjust their selling prices in line with increasing costs. Cash or short-duration bonds are not typically seen in the same light. Leaving cash in the bank, for example, means simply losing money – in real terms – as inflation rises.

However, this is not necessarily true in the short term. As fears of inflation and interest rate hikes come into play, price falls can be so dramatic, as we’ve seen frequently over the past 12 months, that holding the sorts of assets that IVPM invests in can be a more effective strategy. Again, this is unlikely to be a winning one in the long-run if interest rates remain lower than increases in inflation, but it does have the potential to provide some benefits when there is volatility in the wider equities markets.

Looking to the longer term, the Invesco Select: Global Equity Income (IVPG) share portfolio of Invesco Select may be better suited to dealing with the various macroeconomic problems the world is facing. The portfolio is managed by Stephen Anness, who invests in companies from around the world with the goal of delivering a long-term growing dividend and capital appreciation for shareholders.

The income objective means the portfolio has been far less exposed than some of its peers in the closed-end space to the high growth stocks that have seen substantial drawdowns so far in 2022. Stephen and his team also believed that inflation was not likely to be transitory, meaning they have tended to avoid investing in high valuation, speculative growth businesses over the past couple of years .

Instead, they tried to hold those companies that could withstand or even benefit from rising prices and interest rates. The trust’s top 10 holdings, for example, contain energy, financial services, consumer goods, and real estate businesses that look capable of passing on costs to their customers.

This hasn’t prevented the portfolio from being impacted by the market volatility we’ve seen so far this year. Indeed, from the start of the year to 12.08.2022, the portfolio’s NAV has fallen by 2.1%. However, there’s an argument to be made that some of the detractors from performance have been unfairly punished by investors.

Food packaging business Verallia, for example, has seen a substantial decline in its share price so far this year, likely because shareholders believed its input costs, particularly energy, would rise on the back of higher commodities prices. But the company’s earnings numbers suggest it hasn’t struggled to pass those costs on to customers, which would undercut the rationale that led to the sell-off.

At the same time, some of the financial stocks in the portfolio are increasing earnings forecasts and dividend payouts. Zurich Insurance was a notable example, with the Swiss company seeing strong earnings growth and continuing to pay out a relatively high dividend – something it managed to do even during the worst of the pandemic.

Portfolio holdings such as Zurich Insurance reflect the emphasis that Stephen and his team place on investing in dividend compounders. These are companies that have a strong track record of paying and growing dividends over time, with more than 70% of the portfolio typically made up of these types of firms.

These businesses are not guaranteed to navigate the macroeconomic storms we find ourselves in at the moment. But their more defensive, quality characteristics mean they look much more capable of doing so in the near future, compared to the types of firms we’ve seen perform so well in recent years.

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