A buying opportunity has opened across Invesco’s investment trusts, according to Winterflood, with recent underperformance leading to widening discounts across a number of portfolios with strong records over the long term.
The UK equities team at Invesco is going through a tough period at present with five of its six investment trusts considerably underperforming their benchmark in net asset value (NAV) and share price terms over the past three years.
Performance of trusts vs sectors
Source: FE Analytics
While each trust is different, researchers at Winterflood Investment Trusts said the length and extent of the underperformance has led to questions about whether this is due to an investment approach that is “fundamentally flawed”.
However, it noted that the team benefits from “considerable experience and a pragmatic investment approach” which it believes may be well-suited to the more difficult environment in which the market now finds itself.
“In addition, we suspect that its funds will benefit from greater certainty over the ‘Brexit’ process, albeit it remains unclear when this will occur,” Winterflood continued.
“The underperformance over the last three years has seen most of the funds in the stable de-rated and, in our opinion, this presents an opportunity for more contrarian investors.”
Winterflood said the merits of the team’s ethos are best demonstrated by the track record of its head, Mark Barnett. After taking charge of Perpetual Income & Growth in 1999, the FE Alpha Manager outperformed in 14 of the next 16 calendar years.
However, since the start of 2016 the fund has delivered a loss of 13.6 per cent compared with a rise of 21.3 per cent for the FTSE All Share, in part reflecting a de-rating from a 1 per cent premium to a 10.88 per cent discount. It is yielding 4.4 per cent.
Performance of trust vs sector and index since Jan 2016
Source: FE Analytics
“The prolonged period of underperformance can be broadly explained by multiple factors,” said Winterflood. “These include: a number of specific stock disappointments; the headwinds facing some sector calls, such as tobacco; and a preference for UK domestically orientated companies that have been out-of-favour given the uncertainty surrounding Brexit.
“Despite this decline in performance, Barnett’s investment approach, which is shared across the wider team, is unchanged.”
Perpetual Income & Growth is currently Winterflood’s favourite trust among those offered by the group. It is differentiated from Barnett’s other closed-ended fund, Edinburgh Investment Trust, by its higher number of holdings and ability to invest in unquoted companies.
However, Winterflood analysts said there is still much to commend about the latter, including good secondary market liquidity, owing to its large size; low ongoing charges; and attractive yield of 4.3 per cent, with a stated aim of increasing dividends by more than the rate of inflation.
“With the manager having increased the portfolio’s exposure to stocks that offer a return that is uncorrelated to regular business cycles, investors are likely to see natural divergences from the benchmark performance,” it added.
“However, in a year when we have seen increasing scrutiny of the manager’s record, we remain confident in Barnett’s ability as a stockpicker over the long term and believe that Edinburgh Investment Trust’s current discount of 7.34 per cent offers an attractive entry point.”
The group has a third trust in the sector, Invesco Income Growth, which is run by Ciaran Mallon. The trust is pitched as a core holding for investors, aiming to deliver both income and growth. Winterflood said that while its small size means it is often overshadowed by its larger peers, Mallon has done a good job at delivering attractive returns for shareholders over the long term.
“At 68 per cent, the fund has a lower active share than Edinburgh Investment Trust and Perpetual Income & Growth (79 per cent), which means that potential alpha generation will be more limited,” it added.
“Nevertheless, with the largest discount in the UK Equity Income peer group, the fund currently offers good value. In addition, its strong record of annual dividend increases is attractive.”
James Goldstone runs both of the group's trusts in the IT UK All Companies sector: Keystone and the UK Equity portfolio of the Invesco Perpetual Select.
Invesco Perpetual Select is a multi-asset class investment trust that was launched in 2006. It has four share portfolios: UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity with its capital structure allowing quarterly conversions between each one without triggering a disposal for capital gains tax purposes.
Winterflood said that while Invesco Perpetual Select UK Equity has underperformed under Goldstone’s stewardship, he has an impressive longer-term record on his pension fund mandate, while the zero-discount policy reduces downside risk.
“Having said this, we have concerns over the fund’s small size and consequent poor secondary market liquidity, with the discount policy creating the potential for it to continue to shrink further,” it added.
Keystone is differentiated from Goldstone’s other portfolios in that it can hold unquoted companies.
The manager generally favours companies with strong balance sheets, high barriers to entry and the ability to expand market share, believing that these traits help underpin long-term capital and income growth. The manager’s investment approach is anchored around valuation and he is not afraid to take opposing views to other Invesco managers – for example, he has 8 per cent in banks, a sector Barnett avoids completely.
“While the fund is in the UK All Companies sector, the reality is that it has more in common with its stablemates Perpetual Income & Growth, Edinburgh Investment Trust and Invesco Income Growth,” said Winterflood.
“However, Keystone is not as liquid in the secondary market and has the burden of long term, expensive debt through two debentures (7.75 per cent £7m 2020, 6.5 per cent £25m 2023). Despite these headwinds, we believe that there is scope for Keystone to be re-rated over the long term if Goldstone can establish a performance record and deliver a growing dividend.”
The one trust run by the group that has outperformed recently is Invesco Perpetual UK Smaller Companies, which has beaten its IT UK Smaller Companies sector and Numis Smaller Companies ex ICs benchmark over three, five and 10 years.
“While the current discount does not offer particular value, we would expect downside discount risk to be mitigated to an extent by its attractive yield,” Winterflood concluded.