% Grounded In Bonds. Talking With Meggan Walsh Portfolio Manager Invesco Diversified Dividend Fund. by Amy Feldman

Transcription

1 % The dow jones business and Financial weekly DECEMBER 2, 2013 Talking With Meggan Walsh Portfolio Manager Invesco Diversified Dividend Fund Grounded In Bonds by Amy Feldman Robert Seale for Barron s Invesco s Walsh has raised some cash and found attractive new opportunities in energy and European stocks. Meggan Walsh, who runs the Invesco Diversified Dividend fund, came up through the ranks as a bond manager. So when she took over the equity fund in 2002, she couldn t help but keep a focus on corporate balance sheets and how the companies she was considering might be able to withstand difficulties or endure market disruptions. I figured out early on what I was good at, and that was being skeptical and thinking about inflection points, Walsh says. Like many dividend-themed funds, Invesco Diversified Dividend (ticker: LCEAX), which now has $8.7 billion in assets, does particularly well during downturns but may lag a bit in a frothier market. It has returned an average annualized 8.6% for the past decade, versus 7.7% for the S&P 500 index, according to Morningstar. During the financial crisis, it mostly steered clear of large financial institutions the big uglies, Walsh calls them which helped the fund perform 10 percentage points better than the S&P s 37% loss for But, more recently, with the market on a tear, it has trailed a tad, rising 29% for the past year, versus the index s meteoric 31% increase. We don t have heroic upsides, Walsh says. We have kept pace in the recovery, which is a testament to our process. (over please) The Publisher s Sale Of This Reprint Does Not Constitute Or Imply Any Endorsement Or Sponsorship Of Any Product, Service, Company Or Organization. Custom Reprints DO NOT EDIT OR ALTER REPRINT /REPRODUCTIONS NOT PERMITTED 47828

2 Invesco Diversified Dividend Total Returns* 1-Yr 3-Yr 5-Yr LCEAX S&P 500 %of Top 10 Holdings Ticker Portfolio** General Mills Heineken Walgreen Kimberly-Clark Raytheon SunTrust Banks Zions Bancorporation Kraft Foods Group Sysco AT&T Total: 20.58% *All returns are as of 11/26/13; three-and five-year returns are annualized. **As of 10/31/13. Sources: Morningstar, Invesco That process examines both the stock s valuation and its potential for dividend growth. Fittingly for a former bond manager, Walsh starts with the balance sheet, and pays close attention to capital structure. By doing so, she hopes to find firms whose stock prices will rise over time and that have the ability to lift their dividends. While the fund s yield, at 1.5%, is relatively modest, its holdings have been increasing their dividends at a steady pace. We ve been really impressed with the management team, says Chris Karam, CIOof Sheridan Road Financial, a wealth manager in Northbrook, Ill. For the past 4 1/2 years, Sheridan has been using the fund largely for its retirement-plan clients, who have more than $50 million invested in it. Like many other dividend funds, it has very good downside protection, but it also does fairly well in market rallies. The emphasis on dividend growth, and not just yield, is the key from our perspective, he says. Walsh, 49, grew up in Annapolis, Md., as a self-described news junkie. She got a bachelor s in finance from the University of Maryland, and an M.B.A. from Loyola University Maryland, and started her investment career right around the time of the 1987 market crash managing moneymarket securities and conducting financial analysis for the Dutch insurer Nationale- Nederlanden, now a part of ING Group (ING). She joined Invesco in 1991 as a trader of short-term taxable fixed-income securities, and became a bond manager a year later. She moved to the equity side in 1998, and four years later shifted to Invesco Diversified Dividend. It was trial by fire, she says of her early years as an equity manager. In the late 1990s, tech stocks were booming and valuations were getting crazy. Having lived through that high-momentum period and watching that unwind really framed my approach to picking stocks, Walsh says. You need to stay 100% focused on your process and realize that sometimes you are going to be out of step with the market. This year, with the market up sharply, investors have poured more than $1.2 billion in net cash into the fund, compared with less than $500 million last year. But Walsh figures it s a tougher market, so she s focusing on preservation of capital and limiting downside risk and the fund s cash levels have risen to 8%. Still, she s finding some opportunities. The fund has long focused on consumer staples those perennial dividendpayers and they continue to be its top sector, at 22% of assets. Top consumer holdings include General Mills (GIS) and Kimberly-Clark (KMB), both of which now yield 3%. Walsh also likes Newell Rubbermaid (NWL), the consumer-products company whose brands include Rubbermaid, Graco, Sharpie, and Calphalon. They have a long history of earnings misses and execution misses, Walsh says. However, CEO Michael Polk, a former executive of Unilever and Kraft, has been running Newell since mid He seems to be making sense of its product lines and lifting sales and Walsh figures there s room for operating margins to go up and for dividend growth. The stock trades at about 15 times the next 12 months earnings, and sports a dividend yield of 2%. More recently, Walsh says, she has built positions in energy, an area the fund had previously shied away from and which now represents 5% of assets. Her reasoning: As the sector has underperformed this year, valuations have become more attractive, while profit margins seem to be bottoming out at levels above their 2009 trough. Walsh points to Baker Hughes (BHI), an oil-field-services company that s coming out of a rough period. The stock trades at 1.4 times book value, and sports a yield of 1.1%. There are pockets of opportunity in energy that were not there over the past three years, Walsh says. While many big dividend funds solely target U.S. stocks, Diversified Dividend has 11% of its assets overseas, up from 6% last year. The main overseas focus is on Europe, where the profit cycle has trailed the U.S. and where, Walsh figures, valuations are better. We have been adding exposure to Europe throughout 2013, she says. The fund s No. 2 holding, for example, is Heineken (HEIA.Netherlands), the Dutch beer maker. While its profits have been hit by slowing emerging-markets sales, Walsh sees signs of strength in the growth of its premium brands in a weak economic environment. She expects Heineken will be able to increase both its operating margins and dividend, now 1.8%. It s a very high free-cash-flow business with plenty of room to grow the dividend over time, she says. As the market reaches new highs, Walsh continues to consider the downside risks something that comes naturally from her years as a fixed-income manager. I think [that background] helps me stay focused on the interplay between the balance sheet and the income statement, she says. It helps the most at those critical turning points. n

3 Invesco Diversified Dividend Fund Class A Shares The fund s objective is to seek long-term growth of capital and, secondarily, current income. Common stocks do not assure dividend payments and the amount of a dividend if any, may vary over time. There can be no guarantee or assurance that companies will declare dividends in the future or that if declared, they will remain at current levels or increase over time. Investment Results as of June 30, 2014 w/o sales charges w/ max 5.50% sales charge Russell 1000 Value Index 1-year years years Since inception (12/31/01) Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher. Visit invesco.com for the most recent monthend performance. Performance figures reflect reinvested distributions and changes in net asset value (NAV). Investment return and principal value will vary so that you may have a gain or a loss when you sell shares. Had fees not been waived and/or expenses reimbursed in the past, returns would have been lower. Performance shown at NAV does not include the applicable front-end sales charge, which would have reduced the performance. Index returns do not reflect any fees, expenses or sales charges, which would have reduced the performance. An investment cannot be made directly in an index. Index source: FactSet Research Systems Inc. Expense Ratios % Net % Total Class A Shares Class C Shares Investor Class Shares Class Y Shares Per the current prospectus Net = Total annual operating expenses less any contractual fee waivers and/or expense reimbursements by the advisor in effect through at least Feb. 28, See current prospectus for more information. Invesco Diversified Dividend Fund s yield of 1.5% mentioned in the article is the SEC-30 day yield and is as of Sept. 30, The SEC yield as of June 30, 2014 is 1.51%. The 30-day SEC Yield is the yield figure based on the most recent 30-day period covered by the fund s filings with the SEC.

4 There is no guarantee that Invesco Diversified Dividend Fund will continue to hold any one particular security. Holdings are subject to change. As of June 30, 2014, the fund s top 10 equity holdings and percentage weights were: Heineken NV 2.58 General Mills Inc Campbell Soup Co Walgreen Co Royal Dutch Shell Plc B 1.93 Kraft Foods Group Inc General Dynamics Corp Nabors Industries Ltd Zions Bancorporation 1.85 AT&T Inc The fund holdings are organized according to the Global Industry Classification Standard, which was developed by and is the exclusive property and service mark of MSCI Inc. and Standard & Poor s. The Russell 1000 Value Index is an unmanaged index considered representative of large-cap value stocks. The Russell 1000 Value Index is a trademark/service mark of the Frank Russell Co. Russell is a trademark of the Frank Russell Co. Unmanaged index returns do not reflect any fees, expenses or sales charges. An investment cannot be made directly in an index. About risk: If interest rates fall, it is possible that issuers of callable securities held by the fund will call or prepay their securities before their maturity dates. In this event, the proceeds from the called securities would most likely be reinvested by the fund in securities bearing the new, lower interest rates, resulting in a possible decline in the funds' income and distributions to shareholders. The issuer of instruments in which the fund invests may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer's credit rating. The fund's foreign investments may be affected by changes in the foreign country's exchange rates; political and social instability; changes in economic or taxation policies; difficulties when enforcing obligations; decreased liquidity; and increased volatility. Foreign companies may be subject to less regulation resulting in less publicly available information about the companies. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. The investment techniques and risk analysis used by portfolio managers may not produce desired results. The fund emphasizes a value style of investing, which focuses on undervalued companies with characteristics for improved valuations. This style of investing is subject to the risk that the valuations never improve or that the returns on "value" equity securities are less than returns on other styles of investing or the overall stock market. Value stocks also may decline in price, even though in theory they are already underpriced.

5 Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com/fundprospectus. Note: Not all products, materials or services available at all firms. Advisors, please contact your home office. Diversification does not guarantee a profit or eliminate the risk of loss. Book value is the net asset value of a company, calculated by total assets minus intangible assets and liabilities. The S&P 500 Index is an unmanaged index considered representative of the US stock market. An investment cannot be made directly in an index. The opinions expressed by Barron s and Meggan Walsh in this article do not necessarily reflect those of Invesco Distributors, Inc. and are subject to change at any time based on market and other conditions and offer no guarantee of future positive performance for any Invesco fund or security mentioned. This article is provided for educational and informational purposes only and is not an offer of investment advice or financial products. In addition, the results actual investors might have achieved may vary from those shown. Sources: Invesco, Lipper Inc., Bloomberg L.P. Invesco.com/us DDIBARRONS-AD-1 08/14 Invesco Distributors, Inc. 9664