Invesco Select: Balanced Risk Allocation 12 January 2022

Invesco Select Balanced Risk Allocation (IVPB) share’s objective is to generate equity-like returns, but with a lower risk profile over an investment horizon of three to five years. The manager seeks to achieve this by maintaining an exposure to fixed income, equities and commodities, and employ a systematic process to shift tactically around an otherwise relatively static long-term allocation to each of these asset classes.

In contrast to many other ‘active’ multi-asset or ‘flexible’ strategies, the manager’s aim is to balance exposure to each of these asset classes according to their expected risk contribution rather than amount of capital invested. By overweighting the allocations to the less volatile asset classes (such as bonds) and underweighting the allocations to the more volatile asset classes, an equally risk weighted (‘risk parity’) portfolio is created. Because each asset class earns a risk premium over the long term, and they are each uncorrelated to each other, the combination results in a portfolio with significantly improved risk / return characteristics than when compared to any one asset class.

From the adoption of the strategy in February 2012, IVPB has generated compound NAV returns of 5.3% per annum (Source: Morningstar). IVPB has demonstrated its ability to deliver through several very different periods for markets over this period. We note that the strategy has shown explicit strength in historic bear market phases, with the fund having outperformed global equities by 8% on average during bear markets since the strategy inception.

Invesco Select’s board has a zero-tolerance discount policy, which has successfully prevented the discount from deviating far from the board’s target of +/- 2% of NAV. At the time of writing, the shares currently trade on a discount of c. 1%.

The assets underpinning IVPB represent the vast majority of the liquid investment opportunities available globally. That the managers employ a systematic process to shift exposures tactically around their otherwise relatively static long-term allocations to three asset classes, means investors should be able to have a good understanding of how the strategy will perform in different environments. As such, IVPB offers an interesting complement to many of the popular balanced, or low equity correlation, total return funds.

IVPB has delivered good returns since the adoption of the strategy in 2012 with lower volatility than equity markets. Until relatively recently, IVPB’s formal objective and benchmark was to generate a target return of 5% over three-month LIBOR which, as we illustrate in the Performance section, the trust has achieved. With effect from 1 June 2021, a new comparator benchmark has been adopted, with less of an absolute return focus, but enabling shareholders to evaluate the extra value that Invesco has contributed over a static allocation to the three asset classes.

In our view, the strategy has proven itself to have delivered over a medium to long term investment period, even if it does exhibit some exposure to market directionality over the short term. Over the past three years, which have seen very strong gains for equities, it is unsurprising that IVPB has significantly lagged world equity markets. At the same time, IVPB is firmly within the pack of the AIC Flexible peers which have low equity market correlation and therefore, in our view, is a consideration for investors looking for a diversifying element to their equity portfolios.