Perpetual Income & Growth IT

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1 1 Invesco Perpetual is a client of Kepler Trust Intelligence. Research produced by Kepler Trust Intelligence covering Invesco Perpetual should be considered a marketing communication, and is not independent research. Please see the important information at the bottom of the page. IT Summary (PLI) has a good track record over the long term, delivering annualised NAV total returns in excess of 8. per annum over ten years. Over this period, the trust outperformed the FTSE All Share by a comfortable margin, performing particularly well in relative terms thanks to manager Mark Barnett s conservative style during more difficult periods for markets. Driven with a high-conviction, cautious style, PLI has a clear emphasis on risk control, with lower beta than the average trust in the AIC UK Equity Income sector. The trust has much in common with its sister fund, Edinburgh Investment Trust. Both are managed with a benchmark agnostic approach that sees the manager take significant over and underweights versus the index, and both focus on large, cash generative companies that the manager believes are undervalued. Unlike Edinburgh, however, PLI is also able to invest in small and unquoted companies, adding another level of flexibility that allows Mark to invest in companies which, while they may not pay a dividend today, have the potential to grow their dividend exponentially. building his exposure to oil specifically where he thinks the market is failing to recognise the significant self-help that has taken place since the sector was de-rated. BP (4.6) and now Shell (2.6) are in the top ten holdings, with oil & gas now making up 7 of the total portfolio. He prefers companies that are clearly able to grow their dividends and those that have strong barriers to entry. He has for a long time been a fan of tobacco companies in particular, where he sees earnings coming through on the back of mergers and there are clear barriers to entry because of the infrastructure required to operate in this field. British American Tobacco (7) & Imperial Brands (3) continue to be amongst the trust s largest holdings. Pharmaceuticals are another favoured sector where he sees valuations as attractive given the potential for earnings growth and the discount that the sector trades on relative to the wider market. His exposure here includes large pharmaceutical companies like AstraZeneca (3.4), Roche (2.) and Novartis (2.11), however as we discuss in the performance section these have been a drag on performance recently. Industry exposure Despite the manager s formidable reputation, the trust has been on the back foot in the last two years, suffering because it has no exposure to mining stocks (a position which had been to the trust s benefit in 214-1), HSBC or Royal Dutch Shell as they rallied in and significant exposure to domesticallyfocused UK companies that were downgraded after the Brexit referendum and remain deeply unloved. Telecommunications Consumer goods Oil & gas Consumer services Utilities Financials This weak patch of performance has seen the trust slip out to a significant discount of around 9, while still offering a respectable yield of 4. Portfolio (PLI) is a UK equity-focused portfolio comprised in the main of large, cash generative companies in which the manager who invests with a long-term view has built a position because he believes they offer the potential for dividend growth at an attractive valuation. Mark dislikes companies that have little control over pricing, which is why commodities and mining businesses have in the past rarely featured in the portfolio. However, he has been Industrials Healthcare Mark is convinced that pessimism around the implications of Brexit is overblown and the UK economy is in better shape than many people give it credit for. He points to the UK s low unemployment rate and the recent increase in interest rates as signs of economic strength. The bad news is already priced in, he says, and Theresa May s government has undermined its own position so thoroughly via last year s snap election that the likelihood of a hard Brexit is much diminished. Likewise he is sanguine about the implications of a Corbyn victory; his view being that while long term the country would end up mired in debt, the short-term implications for the economy and the

2 2 market excluding areas likely to be considered for nationalisation are fairly mild. Next, Easyjet, Legal & General and Thomas Cook are among his holdings in this camp. Mark highlights Next on a total yield (including specials) of 8 as a particularly attractive bet, with strong cashflows and an overly negative view among investors who see the threat from Amazon, but not the strides that the company has made to improve its own digital offering. The trust is differentiated from Edinburgh which shares much of the approach detailed above by this slant toward companies lower down the market cap scale. PLI has 13.7 of its portfolio in smaller companies, excluding the AIM market not far off double Edinburgh s exposure (8.). The manager will, via this part of the portfolio, invest in companies that do not pay a dividend if he believes the case for dividend growth in the future is strong enough. Further differentiation can be found in the subtly larger stakes that Mark is able to take in companies via PLI. Edinburgh will not own more than of a single company s issued share capital, while PLI stipulates a guideline of 1, with the proviso that if a single company exposure does exceed this limit, it must not exceed 2 of the trust s gross assets. The trust can invest up to 2 of its portfolio outside the UK and the manager will invest overseas where he sees a company that offers better value than its domestic counterpart. Market cap exposure /4/21 Performance : Gearing 26// /8/ /11/21 27/12/ /3/ /6/216 29/7/ /1/ /1/ /4/217 26// /8/ /11/217 27/12/ (PLI) has a strong track record over the long term, delivering annualised NAV total returns in excess of 8. per annum over ten years. The trust has outperformed the FTSE All Share by a comfortable margin, performing particularly well in relative terms thanks to the manager s conservative style during more difficult periods for markets. Despite the manager s formidable reputation, the trust has been on the back foot in the last two years as the graph below shows. PLI suffered because it had no exposure to mining stocks (a position that had been to the trust s benefit in 214-1), HSBC or Royal Dutch Shell as they rallied in and significant exposure to domestically focused UK companies, which were downgraded after the Brexit referendum and remain deeply unloved. Other Split Cap & Inv Companies FTSE Small Cap Fledgling AIM ex Inv Companies Cash & Cash Equivalent 2 : Performance vs Indices International Equities FTSE1 1 1 FTSE 2 ex Inv Companies Gearing The trust has an element of structural gearing, bolstered by a more flexible facility. Borrowings are provided by 6m of 4.37 unsecured notes redeemable in 229 and a bank overdraft 14m. With the growth in the Trust, PLI has seen gearing fall gently over the last three years from around 2 to around 13, and we understand that shareholders should expect it remain a feature over the longer term Ord (Price) Morningstar IT UK Equity Income (NAV) Ord (NAV) FTSE All Share (NAV) The trust s significant exposure to pharmaceuticals healthcare is the second largest industry weighting in the portfolio at 17.4 also hampered performance last year, with a weak performance from the trust s holdings in this sector. These woes were compounded by the collapse of Provident Financial, which saw its share price fall by more than 7 between the trust s last financial year end in March 217 and its interim results in September 217, and by bad news from Capita which slid on the back of disappointing results in September.

3 3 Thanks in part to his high profile and the huge size of the equity income funds he runs at Invesco, Mark has come under significant scrutiny in the press as a result of recent underperformance. However, this is a high-conviction portfolio, and performance is expected to diverge significantly from the benchmark at times particularly when momentum is in full swing : Returns Ord (NAV) FTSE All Share (NAV) Morningstar IT UK Equity Income (NAV) Management and is one of the Henley-on-Thames based group s most senior fund managers. He invests with a high-conviction, cautious approach, looking for companies that can grow their dividend over the long term and aims to be an owner rather than an investor in the companies with which he works. Mark also manages the Edinburgh Investment Trust, one of the UK s largest investment companies with more than 1.6bn under the hood, and the open-ended Invesco Perpetual High Income and Invesco Perpetual Income fund, which between them add an eye watering 1bn in AUM to his responsibilities on the closed-ended side. Mark was also responsible for the Invesco Perpetual Select: UK Equity portfolio and Keystone investment trust, but handed over responsibility for the former to James Goldstone in October 216 and the latter in March 217. The trust s board has seen some movement recently, with the appointment of new chairman Richard Laing replacing Bill Alexander who stepped down last year. Dividend has a strong track record as an income fund, having grown the dividend in each of the past 18 years. Dividend growth excluding specials over the past ten years has been stronger than RPI : Dividend & Revenue Financial Years Discount Those with longer memories will recall the days when this trust was viewed as a tasty bargain when it slipped out to a discount of 3. In recent years the manager s cautious approach and the stock and sector issues we have already discussed have seen the discount slip out dramatically; a situation which has been exacerbated by a steady decline in investor appetite for equity income funds (among the worst sellers according to IA data on open-ended fund flows, as we discuss here). The board has the ability to buy back shares but has not done so in recent years. At the time of writing the shares trade on a discount of c : Discount 1/3/28-28/2/ Source: Invesco PLI currently yields 4 ( ), which puts it ahead of the average trust in the sector. At the time of the last results March 217 we calculate the trust had decent revenue reserves of.6x, although these fell slightly since the 216 year end when they stood at.7x. We understand that the manager sees the outlook for dividend growth as positive. Management Dividend per share (excl specials) Revenue per share Invesco Perpetual head of UK equities Mark Barnett has managed Perpetual Income and Growth since August He joined Invesco Perpetual in 1996 from Mercury Asset /6/28 31/1/28 2/3/ // /7/211 14/12/ /9/212 18/9/214 2/2/213 1/7/ /4/ /11/ /8/216 13/1/ /1/217

4 4 Charges The board removed the 1bn trust s performance fee last year and, since April 217, the annual management fee has been calculated at.6 per annum on the first 9m of gross assets and.4 on anything above that figure. The trust is among the cheaper funds in the entire investment trust sector with an ongoing charge of.6 and a KID (Reduction in Yield) figure of 1.8 compared to an average KID (RIY) of 1.29 in the UK Equity Income sector.

5 Invesco Perpetual is a client of Kepler Trust Intelligence. Research produced by Kepler Trust Intelligence covering Invesco Perpetual should be considered a marketing communication, and is not independent research. Please see the important information at the bottom of the page. Important Information Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only, and is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. This report has been issued by Kepler Partners LLP solely for information purposes only and the views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions. The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this website is exclusively for non-us Persons. The information in this website is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons. This is a marketing document, should be considered non-independent research and is subject to the rules in COBS 12.3 relating to such research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice. This is not an official confirmation of terms and is not to be taken as advice to take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm s internal rules. A copy of the firm s conflict of interest policy is available on request. Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction. PLEASE SEE ALSO OUR TERMS AND CONDITIONS Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/1 Savile Row, London W1S 3PF with registered number OC Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.