This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Invesco Income Growth (IVI) and Invesco Select Trust’s UK Equity (IVPU) shares are merging to create a vehicle with up to c. £200m of gross assets. Under the umbrella of Invesco Select Trust (which has three other share classes offering global equities, multi-asset and cash exposures, and was renamed in early March from Invesco Perpetual Select Trust), the combined fund will thereby take a significant step towards achieving critical mass, but will also share fixed costs of running the trust across a larger pool of assets.
Ciaran Mallon and James Goldstone, previously sole managers on each trust, have worked in the same team at Invesco for eight years. They will now work together on Invesco Select UK Equity, building on the successful partnership they have developed since May 2020 when they became co-managers on Invesco’s open-ended UK Equity High Income and UK Equity Income funds. Since then, these funds have outperformed their benchmarks by 2.7% and 4.1% respectively (data to 28 February 2021).
Ciaran and James, in their previously independent roles, had different portfolios. That said, they both have the same Invesco-style valuation led investment philosophy, based on fundamental analysis. Combined, we understand that Ciaran and James will take joint ownership of each holding in the 40-50 stock portfolio, representing their highest conviction ideas. Each brings a different experience and viewpoint to the discussion, and both have to agree on each stock that is held in the portfolio. Ciaran and James believe that becoming co-managers simply formalizes the team dynamics that previously existed: a consistent element of Invesco’s process revolves around regularly challenging each other on the investment thesis for each stock held. This occurs within teams, but also through regular meetings with Invesco’s CIO and Risk Oversight Function. Fundamentally, Ciaran and James speak the same language, and their approaches complement each other. Ciaran has a strong focus on company fundamentals, whilst James has historically placed greater emphasis on valuations.
Ciaran and James share the same investment process, and use the same sources for finding new ideas (sell side research, reading, screening). The team approach, incorporating the four other members of the UK large cap team, as well as small-cap specialists Jonathan Brown and Robin West (managers of Invesco Perpetual UK Smaller Companies Trust), results in a regular discussion on stocks – both already within the portfolio and on new ideas. With respect to Invesco Select UK, the mandate will be high conviction and multi-cap, and the team expect to use the closed-end structure to enable them to make increased use of small-cap ideas to the benefit of shareholders – both from an income and a capital growth perspective.
A potentially useful feature of the portfolio is that the managers expect to have a relatively balanced portfolio as regards ‘growth’ and ‘value’ characteristics. This comes through in the following summary of the themes that the portfolio is initially expected to have exposure to:
UK Domestic – businesses which derive the majority of their earnings from within the UK and that are influenced by UK domestic economic and political drivers, and expectations for changes therein.
International Value – ‘International’ refers to UK listed companies that derive the majority of their earnings from overseas and whose businesses are subject to a greater extent to international / global economics and political drivers. ‘Value’ refers to opportunity derived from market inefficiencies in pricing of income and cash flows that can be generated largely from existing / modest growth in capital and resources employed.
International Growth – UK listed companies that are ‘International’ (as defined above) but which present a ‘Growth’ opportunity from market inefficiencies in the pricing of growing levels of income into the future, achievable from successful deployment of increased levels of capital and resources.
Recovery – companies whose share prices have suffered disproportionately for a period of time due to the market's assessment of risks, but that now have the potential to turn around.
Transformers – companies whose management teams have anticipated and responded to developments which pose severe threats to their existing business models and have driven change so as to be able to take advantage of opportunities created by those same developments.
We understand that aside from strong total returns, James and Ciaran will also aim to deliver an attractive level of dividends for shareholders. Currently, both trusts offer a dividend yield in excess of 4%, which compares to the yield on the FTSE All Share of 4.5% (although there is clearly some uncertainty over this given the current pandemic lockdowns). The board of Invesco Select Trust has historically used capital to support and maintain the dividend for the UK shares, which in the past has enabled investors to have a high degree of confidence on the dividend distribution each year. Reinforcing the emphasis placed on the dividend by the board, Invesco Select UK will move from the AIC’s UK All Companies sector to the UK Equity Income sector.
Invesco Select Trust’s board has a policy of maintaining the market price of the trust’s shares at close to the NAV through buybacks and share issuance. It is expected that this policy will continue, although we note that there are no guarantees that they will be able to continue to do so – especially at periods of high market volatility.
As many industry commentators have observed, the UK equity market looks good value relative to international peers. According to JPMorgan research, on a price to earnings basis, the UK market is at its lowest point in the past two decades compared to other economies. According to their figures, the UK is trading at less than 14 times, compared with 23 times in the US and 17 times in Europe. (Source: The Financial Times, 'UK Plc up for sale…'). With much Brexit uncertainty removed, and the UK leading the world in rolling out COVID vaccines, there is a good prospect of a speedy recovery for the UK economy. This could well be the perfect time for a concentrated best ideas portfolio which allows gearing such as Invesco Select UK.
Over the long term, we believe that having these two fundamentals-based managers combine their efforts on the new Invesco Select UK Equity trust is a strong positive for the sector and for shareholders. The result will be a high conviction portfolio, focusing on companies of all sizes in the UK, and through the trust structure with the latitude to shape the portfolio as they see fit. With complementary skill-sets, the trust should be in a strong position to deliver on its objectives for shareholders: attractive total returns from a valuation sensitive investment process and a good level of income. We look forward to seeing more details on the portfolio once the changes have been made, and believe the refreshed proposition is a welcome addition to the AIC’s UK Equity Income sector.
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