Q. What is the underlying methodology behind the fund?
Initial ideas for the Invesco Perpetual Global Opportunities Fund stem from a number of sources which include:
– Internal regional fund management teams
– Company meetings
– Research trips
– Third party brokers/research
Once an idea has been generated we develop an understanding of the drivers of the business and the position of that company within the industry in which it operates. We try to understand the outlook for revenues, profit margins, return on capital (a ratio which measures a company’s profitability and the efficiency with which capital is employed) and cash generation. We spend a lot of time analysing industry dynamics as we are investing in the future operations of the company, not the past.
The key focus of our process is valuation. We take a pragmatic approach to valuation as there is not one particular valuation methodology suitable for all business types. We tend to look at:
– Cash flow
– Asset backing
– Return on capital versus cost of capital
– Longer-term earnings forecasts, two to three years hence
– The ability of a business to compound value
– The degree to which a business can be improved via self-help
We view risk as the risk of losing money, not necessarily the volatility of share price. We can potentially reduce the risk of losing money through fundamental analysis of a company and by imposing stringent valuation criteria on stock selection. In essence, not only does valuation help us source investment return potential, it is also a risk management tool.
We constantly review our investment process to try to identify areas for improvement.
Q. Are particular types of companies currently favoured?
We look for two types of investments. The first is fundamentally strong businesses that exhibit excellent operating characteristics such as high revenues, good management and opportunities to invest and grow the business and compound value over time. We will not over pay for these businesses so we will only buy them where we believe they are out of favour with the market and their share prices have become cheap, in our view, relative to the true strength of the businesses behind them. This could be for a variety of reasons: they could be poorly analysed, have missed recent short-term expectations or they may have become overlooked in favour of the latest fad of the investment world.
The second type of investment is companies which do not currently exhibit excellent operating characteristics but where we believe that they can through changing management or changing the structure of the business. We focus on those companies that, despite having challenges, still offer a product or service that continues to be relevant. Although a smaller component of the fund, we believe that these special situations can potentially create value for the fund.
Q. In which areas has the most value been found in 2013?
Europe has seen a return to favour with indices tracking the share prices of European companies rising significantly over the year. While the Eurozone’s problems are far from being resolved, in our view, low starting valuations for equities, rather than earnings growth, have been the primary driver of the move. Strong stock picking within the region and an overweight exposure versus the benchmark index benefitted the fund’s European exposure.
In the UK, at a macro level, economic growth expectations have improved consistently over the review period. Like other developed markets, the UK equity market has re-rated on the back of attractive valuations and a perception of lower risk compared to recent years as economic growth expectations continued to improve. As such, the fund gained from strong stock picking and an overweight exposure to the UK.
Q. What areas for investment will be favoured in 2014?
We will continue to focus on identifying the two types of company described above. We believe that consistency of process is the key to delivering good returns for clients.
In our opinion, one of the key drivers in 2014 will be delivery of earnings growth by companies. In a number of markets last year performance came from a broad re-rating of stocks, rather than significant improvement in company fundamentals. We believe that in 2014, the market will reward those companies who are able to deliver the earnings growth expected of them. We will continue our exhaustive bottom-up analysis to try and identify these businesses.
In addition, one area we feel we are beginning to swim against the tide of consensus opinion is on emerging markets. We have very limited exposure at the moment but we are seeing the emergence of interesting stock-specific stories. We are not bullish on emerging market economies per se, just that their underperformance versus the broader market in 2013 and universal bearish sentiment has, we think, exposed some well-managed strong franchises at very attractive valuations.
Q. What do you expect to be the biggest challenges for the fund over the coming year?
This is very much a stock-driven fund but clearly the macro-economic environment is important. We therefore take a view on the macro environment in which companies operate. We currently believe that the global macro-economic backdrop is recovering, albeit slowly, as challenges remain. Growth will be harder to come by in 2014 compared to last year and we must not mistake a bounce back from severe recession in Europe, for example, for sustainable economic growth. With many equity markets now hitting new highs we would suggest it is unlikely that 2014 will see the scale of market returns seen in 2013. However, as bottom-up stock pickers, we invest in companies, not economies. With such a broad mandate we still see value in many equities across the globe and maintain an optimistic outlook for both relative and absolute performance over the longer term.
This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Invesco Perpetual has expressed its own views and these may change. The data contained in this document has been sourced by Invesco Perpetual and should be independently verified before further publication or use. Neither this nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the fund or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Fund or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the fund as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances.