Invesco Select: UK Equity 09 November 2022

Invesco Select: UK Equity (IVPU) has been managed jointly since April 2021 by Ciaran Mallon and James Goldstone, who previously worked closely together in the UK equities team. The co-managers aim to achieve a balanced portfolio in which no one factor has an overriding influence on returns. In our view, this makes the trust a potential all-weather source of equity income – particularly given the freedom that the Dividend policy offers by enabling the managers to invest for the highest total returns possible (due to the board being prepared to contribute capital to dividends).

This is a high-conviction portfolio (typically of 40 to 50 stocks), representing the managers’ best ideas across the market capitalisation spectrum. James and Ciaran aim to use gearing fairly consistently (see the Gearing section), but this belies what we view as a relatively cautious approach to investing. Underpinning their stock-picking is a desire to identify UK-listed companies that exhibit strong or improving returns, have proven management teams and strong balance sheets, and are trading at attractive valuations.

Large UK-listed companies are well represented in the top ten holdings. However, the team believe that over the long term, smaller and younger companies should outperform large-cap stocks, and the closed-ended structure allows them to allocate a proportion of capital to opportunities in the FTSE 250 and below.

James and Ciaran’s approach to achieving balance within the portfolio will perhaps resonate even more with investors during the current market volatility and political uncertainty. For those with a long-term outlook, the current discount to NAV (see the Discount section) may add extra kerb-appeal.

It is clear that James and Ciaran think as hard about constructing a balanced portfolio as they do about valuations and picking stocks. By having balance within the portfolio, the team believe that over the medium to long term they are well equipped to meet the challenges that investors face. In this way, the team hope to deliver good total returns through stock selection without being exposed to a narrow set of industry or style-specific drivers.

IVPU is differentiated from its peer group as the board’s long-standing policy of supporting dividends with capital enables the managers to balance the portfolio by investing in lower-yielding opportunities and/or mid and small caps which may have higher total returns. This makes IVPU potentially of interest as a complement to other UK equity income trusts and funds.

As we discuss in the Performance section, the early outperformance the team delivered has largely been given back since Russia invaded Ukraine. However, the team have worked hard to sift the portfolio and reposition it in light of the new reality.

IVPU’s Discount to NAV has widened dramatically over the past couple of months, as have the discounts of many other investment trusts. However, once market conditions become calmer again the fundamental attractions of IVPU may be better able to shine.. In that scenario the current discount to NAV of 12.3%, relative to the peer group’s weighted average discount of 5.6%, may seem somewhat incongruous.