A combination of stock-specific issues, broader portfolio positioning and the impact on performance of stocks not owned made Q3 2018 the most challenging period for the Invesco Global Opportunities team in 10 years.
Invesco Perpetual’s Stephen Anness and Andrew Hall, who oversee the £244.5m Invesco Global Opportunities fund, said that several issues had conspired to make it a difficult quarter.
Part of the problem has been the team’s avoidance of the major US technology stocks it does not own, as the managers do not believe the ‘narrowness’ of market leadership is a healthy sign.
“This quarter has been the most challenging we have faced from a performance perspective,” they explained.
“When you consider the impact of our underweight to a very narrow market leadership it has further accentuated matters, resulting in a very poor relative return outcome for the quarter.”
However, the pair said they had “checked and re-checked” their work on individual stock ideas and stood by them.
“The meritocracy of the portfolio remains critical; we continue to concentrate the capital in our highest conviction ideas. We remain as disciplined in this as ever,” they said.
As such, the key geographic and sector positions had not altered significantly over the past few quarters, said the pair, and the portfolio continues to consist of stocks trading at a discount to intrinsic worth and should outperform over time.
Indeed, Anness and Hall said they had rarely witnessed a time when valuation was of such little importance to the market as the previous quarter.
Performance of indices YTD
Source: FE Analytics
“The market has become increasingly nervous about flattening yield curves, trade wars and the risk of an economic slowdown,” they noted. “With this backdrop, companies which are seen as economically sensitive have been very much out of favour.”
As mentioned above, one of the significant detractors to performance was not owning the US technology giants beloved of investors in recent years.
The Invesco Global Opportunities managers noted that the most popular US tech names have contributed to two-thirds of this year’s market return despite only accounting 8 per cent of its market capitalisation.
The underweight to the stocks is part of a broader underweight to the US stocks compared with global markets, where the managers have found a greater number of ideas.
“In a concentrated portfolio such as this one this effect can be magnified,” they said. “This is not a top-down decision but is the outcome of our bottom-up stock selection. This ‘underweight’ has been a feature of the fund for a number of years now and has not hampered performance.”
However, the managers noted that given the “remarkable” performance of the US market relative to the rest of the world, keeping this underlying positioning has been more difficult than normal.
Regarding broader portfolio positioning Anness and Hall said their holdings in financials and industrials have also been disappointing.
“Our holdings in financials and industrials have generally been disappointing. The issues around WLTP [worldwide harmonised light-vehicle test procedure] emissions-testing in Europe have caused the auto sector to perform poorly.
“We are of the view that this is a short-term industry bottleneck and that market short-termism is providing us the opportunity to buy good companies at discounted valuations,” they added.
When it comes to stock-specific issues, Anness and Hall noted there were three which impacted performance in the quarter, the most significant being Bayer, one of the largest positions in the portfolio.
Performance of Bayer YTD
Source: Google Finance
“Having finally consummated the deal to acquire Monsanto, Bayer was almost immediately impacted by the loss of a State court case in California regarding the herbicide chemical glyphosate.
“In life sciences there is always risk associated with product liability cases; we knew that risk when we invested in Bayer but felt the risk was mitigated by the breadth of their portfolio of pharmaceuticals, crop science, animal health and consumer health products.
“We have added to the holding and taken the position back to broadly where it was before the fall in share price.”
Another position they noted has been disappointing is their holding in UK tour operator Thomas Cook, which fell more than 40 per cent over the quarter impacted by extremely hot weather in the UK and northern Europe – its key source markets – over the summer months.
Chinese e-commerce company JD.com, which was impacted by two operational issues and one related to its CEO conduct, was another stock that impacted the fund’s performance.
As a result, the team has decided to reduce their position in the holding and recycle the capital into companies in which they said they have higher conviction.
There were some positive contributions to performance, however, including Taiwan Semiconductor, Novartis and US holdings such as United Technologies, Citigroup, Markel and Altria.
“As investors we share the inevitable disappointment and frustration, however we remain as confident in the long-term prospects of Invesco Global Opportunities as we ever have been, evidenced by the fact we have added significantly to our personal holdings,” they concluded.
The fund is down by 6.51 per cent year-to-date compared with a loss of 0.34 per cent for the average IA Global sector peer and a 1.04 per cent gain for the MSCI AC World index.
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.95 per cent.