Is it the UK’s time to shine?

Lots of investment trusts purport to take advantage of the structural benefits their legal status confers on them, but few make greater use of it than the Invesco Select Trust.

The closed-ended fund is unique in being comprised of four different share classes, each one giving the holder exposure to a different portfolio. Investors can switch between classes once a quarter without having to realise a capital gain.

One class is in global equities, another is split between equities, fixed income, and commodities, and a third mainly holds sterling-based debt securities. The fourth and largest share class is in UK equities.

Each of these has its own benefits. For instance, the debt portfolio may be useful for an investor if they wanted to move from stocks to fixed income without crystalising a gain and being liable for tax.

Growing dividends, attractive real long-term total return

But it’s Invesco Select: UK Equity (IVPU) that tends to attract most of the attention. Its goal is to provide an attractive real long-term total return for shareholders, as well as generate an increasing dividend, by investing mainly in listed UK equities.

The UK Equity portfolio, managed by James Goldstone, underwent a major change last year when it merged with another of Invesco’s closed-ended funds, Invesco Income Growth, managed by Ciaran Mallon. The fund is now co-managed by the two, replicating the partnership that they have in managing the open-ended funds for the asset manager that invest in a similar area of the market to the one IVPU covers.

The pair have worked together at Invesco for almost a decade in the UK equities team and take slightly different approaches to the market. Mallon tends to look more at company fundamentals, whereas Goldstone is more focused on valuations. It’s still early days but these complementary views on the market may prove useful.

That’s because a balance between growth and value stocks is likely needed to help support the investment trust’s goals of providing an attractive total return and increasing dividend payouts to shareholders.

Too harsh

Of course, achieving these has been more challenging than usual over the past decade. A sluggish large cap market, combined with the grey clouds of Brexit uncertainty, have meant returns for UK equities looked relatively low when compared to other markets.

This isn’t the whole story though. For one thing, small caps, which IVPU has some exposure to, have delivered much more respectable returns than the top end of the market. It’s also the case that few things in life are permanent and investors may have been overly harsh in their treatment of the UK.

London-listed stocks are still trading below their 20 year median valuation on a price-to-book basis. In comparison, almost all other developed economies are trading above theirs, as are many emerging markets.

More opportunity

The usual retort to this is that the UK is valued that way for a reason. It has poor quality companies and investors’ decision to shun the market is simply a reflection of that. This argument doesn’t really hold water.

The UK utilities, banking, healthcare, and telecoms sectors have all seen underperformance since the Brexit vote relative to their US peers. These are not the sorts of tech-driven growth stocks that we typically see as having caused the disparity in performance between those two markets. It is important to understand though, that these themes are simply an anecdotal outcome of the investment process and are not a conscious part of the portfolio construction.  

What that suggests is UK stocks have been punished across the board and that investors may have devalued them far more than they ought to in response to Brexit. There are obviously no guarantees they’ll suddenly realise this and start buying as a result. But it does indicate there could be more opportunities in the UK compared to other, more highly valued markets.

Taking an active approach

Taking an active approach to the market is arguably the best way to find these opportunities. Even if many UK companies have been unfairly devalued, there are still going to be plenty out there that are less likely to see a rebound than others.

Mallon and Goldstone’s portfolio fits the bill here. Its active share, the degree to which it differs from its benchmark, is high at over 70%. The pair also typically hold between 40 to 50 stocks and use gearing to potentially enhance returns, making it a much higher conviction portfolio than many of their peers.

Companies that they invest in tend to fit within five themes – firms doing business in the UK, value stocks focused outside of the UK, growth stocks focused outside of the UK, recovery stocks, and companies which are engaging in some form of new activity that could boost their value.

A firm must produce good returns and have a strong balance sheet if it wants to make it into the UK Equity portfolio. The investment trust managers will also look at the quality of company management and ensure they’re buying shares at what they believe to be an attractive valuation.

It’s early days but Mallon and Goldstone have seen some success with their approach so far, outperforming their peers and a benchmark of UK equities. Investors who believe the UK is likely to see a rebound after several years in the doldrums may find Invesco Select Trust’s UK Equity Share Portfolio, and the flexible structure within which it sits, appealing against that backdrop.

STANDARDISED ROLLING 12-MONTH PERFORMANCE

Source: FE Analytics
Past performance is not indicative of future returns. Correct as at February 2nd 2022. Bid-bid in GBP terms

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