Invesco Perpetual Select: Global Equity Income

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1 Invesco Perpetual Select: Global Equity Income is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security or securities discussed. Invesco Perpetual Select: Global Equity Income Summary IP Select s Global Equity Income Share Portfolio (IVPG) has been run by the Invesco Perpetual Global Equity Income Group (The Group) for over five years now. The Group represents a set of regional-specialist managers from their Henley-on-Thames offices. They aim to achieve a growing level of income return each year, with capital appreciation over the long term, through a concentrated but diversified portfolio of global equities. The trust actively uses the unique advantages of the closed-end structure to do this, including gearing, a dividend policy, which looks to smooth payouts through capital, and an active discount control policy, which has historically prevented the trust s shares from slipping to a significant discount to NAV. A key differentiator of IP Select Trust is that it is split into four share classes, each pursuing different strategies, and each led by a different manager, but sharing the costs of the structure. Alongside the shares, the others are UK Equity, Balanced Risk Allocation and Managed Liquidity. Investors in the trust can switch between the share classes on a quarterly basis. This profile focuses only on the Global Equity Income share class. IVPG s portfolio is relatively concentrated, comprising of approximately 53 stocks. The Group management team looks to invest in high-quality companies at attractive valuations, offering appealing yields, sustainable income and capital upside. The trust continues to hold significant exposure to oil companies and banks, and an underweight to the US. This underweight to the US (particularly to technology names), has meant that despite its good longer-term track record, the trust has struggled against the benchmark YTD. Despite this, the trust has performed significantly better on a total return basis than the average global equity income investment trust or OEIC, over both five years and YTD. Overall, the portfolio currently yields 3.6 (on a gross basis), which is near a 5 premium to world equity markets. At a portfolio level the Group expects growth in earnings and dividends at a 6-7 level, held back in part by their significant energy and financials holdings, where they have relatively modest expectations of dividend growth over the short term. Update 1 October 218 Analysts: William Heathcoat Amory +44 () Pascal Dowling +44 () Thomas McMahon, CFA +44 () William Sobczak +44 () Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only. The material contained on this site is factual and provided for general informational purposes only. It is not an invitation or inducement to buy, sell or subscribe to any product described, nor is it a statement as to the suitability or otherwise of any investments for any person. The material on this site does not constitute a financial promotion within the meaning of the FCA rules or the financial promotions order. Persons wishing to invest in any of the securities discussed in the website should take their own independent advice with regard to the suitability of such investments and the tax consequences of such investment. Shareholders have seen impressive year-on-year increases in dividend payments. The last financial year saw a total dividend of 6.7p, which was very nearly covered by earnings of 6.4p. The increase in dividends over the past five years represents a compounded annual growth rate of 14.5 per annum. At the current price, the shares yield 3.3 as of 2 September

2 Portfolio IVPG s portfolio is relatively concentrated and made up of the Group committee s best ideas, which offer attractive yields, sustainable income and capital upside. The portfolio currently comprises approximately 53 companies which are high quality and trading at what the team views as attractive valuations. They like each stock to make a difference to the portfolio, hence its slightly more concentrated nature. The committee looks particularly for businesses that can sustain profit margins and deliver positive returns through the economic cycle. It sees growing and sustainable dividends as clear evidence of these sorts of companies. Top Ten Holdings Royal Dutch Shell - A Netherlands 3.3 Chevron US 3.1 Total France 2.9 Orange France 2.9 BP UK 2.9 JPMorgan Chase US 2.8 Pfizer US 2.7 Equinor Norway 2.5 Taiwan Semiconductor Taiwan 2.4 United Technologies Taiwan 2.4 PORTFOLIO 27.9 Relative valuations (within sectors and across geographies) play a large part in the investment selection process, but there is emphasis on quality of management, strong balance sheets, cash generation and, crucially, the ability to provide dividend growth over the next one to three years. Currently, the managers report a mix of companies in the portfolio. Some (such as their tobacco and oil exposures) offer very high yields, but relatively low expectations of growth. Others (such as RBS and Nasdaq) have relatively low yields but much higher expectations of dividend growth. Geographically, the portfolio is overweight the UK (17) and Europe (37), and underweight the US (35) relative to the MSCI World Index. Much of this is valuation and stock led, rather than any specific macro view from the managers. Indeed, as we discuss below, much of the relative underperformance recently can be attributed to the very low weighting to large US technology names. The trust does own Microsoft, Taiwan Semiconductor and Broadcom, but as one might imagine from the Invesco team, they find it very difficult to rationalise many US technology valuations, especially so given the lack of dividends many of these companies pay. On the other hand, the managers maintain their long standing positive stance on the energy sector, as well as financials. Industrials have been trimmed with the allocation to healthcare gently rising (and consisting entirely of pharmaceuticals), where the team see excellent value and highly consistent earnings / dividends. For example, they have recently added Gilead to the portfolio which offers a yield of 2, with what the team views as good growth prospects. Overall, the portfolio currently yields 3.6 (on a gross basis), which is near a 5 premium to world equity markets. At a portfolio level the team expects growth in earnings and dividends of 6-7, held back by the significant part of the portfolio where they have relatively modest expectations of dividend growth, energy. The team has favoured cyclical sectors for some time. They believe that investors seeking income have become too fond of bond-proxies in defensive safe haven sectors like consumer staples and these areas have, as a result, become relatively expensive. As such, at the time of writing, the portfolio is significantly underweight in healthcare, utilities and the consumer defensive sector. The team are once again looking at increasing their consumer staples names, with stocks across the world having de-rated significantly, especially in the US. Currently the portfolio consists of Ahold, Tesco and Carrefour but the team is monitoring companies such as Coca Cola and Colgate. Fig.1: Regional Exposure : Regional exposure United Kingdom Source: Invesco Pacific Rim Japan Latin America North America Europe ex. UK In terms of outlook, the team reports being relatively sanguine. They don t expect global growth to dissipate. At the same time, they remain wary of valuations in the US, but see Asia and Japan offering much better value from a macro perspective although they have yet to find bottom up ideas which fit their criteria. 2

3 Peers Relative to investment trust peers, IP Select has one of the lower yields, which ties in with the managers objective of not reaching for the highest yield per se, but investing in tomorrow s high yields and targeting those companies that can grow their dividends. On the other hand, it has performed relatively well in total return terms, ahead of the average investment trust, but also only just outside the top quartile of open-ended global equity income funds too. Interestingly, whilst the trust is amongst the most concentrated (in terms of number of stocks) in the investment trust sector, it registers around the average when compared to open-ended funds. Gearing may use bank borrowings to increase exposure to the stockmarket with the aim of enhancing returns to shareholders. Typically, the managers anticipate using gearing at times of market weakness, and trimming when they find it hard to find new ideas at sensible prices. As can be seen below, over the past three years the gearing has gradually decreased. In February 215 for example, the trust employed 14, with gearing being reduced aggressively around the time of the EU referendum in 216. At the current time, the managers are c.6 geared. Fig.2: Gearing Of Nav 12 Gearing the highest achievable yield, has meant that the trust has outperformed peers in the investment trust and open-ended space by a country mile (25.5 ahead of the investment trust global equity income sector and 17.9 ahead of the IA global equity income sector, according to Morningstar statistics). Fig.3: Five Year Nav Returns NAV total returns Morningstar IT Global Equity Income MSCI World IA OE Global Equity Income As the graph above illustrates, the past few months have seen the trust struggle against the MSCI AC World Index. The managers attribute this to their underweight exposure to the US, which has outperformed every other region of the world. In particular, they observe that performance has been led by an increasingly narrow number of stocks, most of which they view as uninvestible for this mandate (either based on valuations, or more simply because they don t typically pay dividends). The graph below shows the trust lagging the index more clearly. It is worth noting that the trust remains ahead of peer benchmarks which are similarly affected because of their income biases. (1 = ungeared) Fig.4: One Year Nav Performance NAV total returns Returns -5-1 Oct '17 Jan '18 Apr '18 Jul '18 From a purely objective standpoint, the graph below shows the trust has met its aim of achieving good total returns over the long term. The Group took responsibility for the portfolio in December 212, and so has a track record on the trust of over five years now. Certainly the emphasis on dividend growth, rather than investing for Morningstar IT Global Equity Income MSCI World IA OE Global Equity Income The start of the year saw global equities struggle Q1 of 218 was the worst quarter for the sector in more than two years. However, US equity markets have recovered 3

4 particularly strongly, which has meant that the MSCI World is now +8 in GBP terms, against which IP Select Global NAV total return has been +2, in line with openended peers, and 4.5 ahead of the average Global Equity Income investment trust. Fig.5: Performance Dividend As the graph below shows, shareholders have seen very meaningful increases in dividends over the past few years. For the past three years, the board has been paying quarterly, with three equal interim dividends declared in July, October and January, with a larger wrap-up fourth interim dividend declared in April. At the time of writing, IVPG s historic dividend of 6.7p is equivalent to a yield of 3.3. pence per share Source: Invesco Fig.6: Historic Dividend And Earnings (Financial Years) Dividends and earnings per share (financial years ending 31 May Dividend (pence per share) Calendar year returns NAV Morningstar IT Global Equity Income MSCI World IA OE Global Equity Income Revenue (pence per share) The trust has a dividend policy, employed by the board since the 216 financial year, which means that it can choose to supplement income with capital profits. This reflects the board s desire for the managers to concentrate on finding stocks that are growing earnings sustainably, rather than those that offer a high yield now. This initially led to a very meaningful increase in the dividend (see above). However, over the year to 31 May 218, the board paid a total dividend of 6.7p, which was very nearly covered by earnings of 6.4p and shows the manager s approach to dividend growth in the underlying portfolio is paying off. The increase in dividends over the past five years represents a compounded annual growth rate of The first interim dividend level of the current financial year has been set at 1.5p per share, a 3.4 increase on the interim level last year. The board has stated that it has an expectation that it will be able to at least maintain the level of dividends from the previous year, and the hope is that over time it will be able to continue to pay a rising level of dividends. Management Nick Mustoe chairs the Group that manages the portfolio, which took over the running of the trust in December 212. The Group is formed by team members from each of Invesco Perpetual s geographic teams in Henley-on- Thames and chaired by Nick, who is also the UK chief investment officer. The UK is represented by Tim Marshall, Europe by Stephanie Butcher, the US by Simon Clinch, Asia by Tim Dickson and Japan by Tony Roberts. Andy Hall also sits on the committee as part of the global opportunities strategy. Each of them have the typical Invesco Henley angle of preferring well-established companies that are able to deliver solid returns through the cycle, even if these are more expensive than their peers. The team has an average of 23 years in the industry and meets fortnightly to discuss stock ideas on a one in, one out basis. Each member of the team has a proportion of their remuneration based on the overall performance of the strategy. Discount A key feature of the trust is the board s zero tolerance discount control policy. This policy allows the board to buy back shares when any oversupply in the market (from selling) causes them to slip out to a discount, and issue new ones (or reissue shares held in treasury) when demand for the share class pushes the shares to a premium to NAV. The intention is to reduce the vitality of the discount and to improve liquidity in the market for investors wishing to buy or sell. Since January 213 the board has implemented this policy, offering investors the opportunity to buy and sell within 4

5 a range of +/- 2 of NAV. As the graph below illustrates, it has been broadly successful in achieving this. At the current time, the shares trade to a slight discount (-1), compared to the average for the investment trust peer group of a premium of.2. Fig.7: Discount/ Premium To Nav 1 (Discount) / Premium to NAV Charges Morningstar IT Global Equity Income Average The basic management fees for IP Select Global Equity Income were reduced from.65 to.55, with effect from 1 June 217. At the same time, the performance fees payable were also reduced from a maximum of.65 to.55 of net assets. As such, the total OCF for the Global Equity Income share class including both the annual charge and the performance fee is.79. Ongoing charge figures represent the total operational expenses of the trust, and include the cost of the management fee as well as other costs, such as dealing. The size of a trust affects the operating cost, and it can be the case that a larger trust has a lower operating cost than a rival even if both have the same annual management, because of other factors such as economies of scale. It is also important to note that for the performance fee, any underperformance of the benchmark or performance above the cap is carried forward to subsequent periods, and any underperformance must be offset by future overperformance before any performance fee can be paid. 5

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