Invesco Income Growth outperformed the FTSE All-Share Index over the year to the end of March 2016, returning -2.6% against -3.9% for he Index. The discount widened however (from 5.3% to 11. 5%) and so the return to shareholders was -7.8%. The full year dividend was upped from 10.1p to 10.3p.
The manager says that a number of long term holdings made a positive contribution to the performance of the fund, notable amongst these was Imperial Brands (formerly Imperial Tobacco). As part of on-going consolidation in the industry, Imperial Brands acquired certain US brands, including Winston, and production facilities – a purchase which Imperial anticipates will be positively incremental to earnings. Dividend growth and profit margins remain healthy across the tobacco sector, driven by product innovation, tobacco quality improvements and cost rationalisation, in spite of the continuing volume decline.
The holding in Young & Co’s Brewery delivered impressive sales growth against a declining beer market, as the company continued to benefit from the sale of its London brewery and its focus on the acquisition and roll out of premium pubs. Croda saw its shares perform strongly, as the company’s niche position in
speciality chemicals enables it to deliver organic revenue growth, rising margins and cash returns in the form of special dividends.
Other holdings which contributed positively to the portfolio’s performance included Bunzl, Informa, Nichols, National Grid, RELX (formerly Reed Elsevier) and Severn Trent. All of the companies named above have been held in the portfolio for at least the past five years, and in some cases very much longer.
A relative newcomer to the portfolio is veterinary services company CVS, which was added in 2014. The company continues to expand rapidly and profitably through acquiring businesses in the highly fragmented and growing veterinary market. The increased prevalence of pet insurance, which drives demand for higher cost services, as well as the company’s online animal pharmacy, labs and crematoria businesses, is underpinning levels of growth in the medium term. The shares rose by over 50% in the year.
The performance of the portfolio relative to its FTSE All-Share Index benchmark benefited from the portfolio’s underweighting of the banks sector but, within the oil & gas sector, the absence of a holding in BG Group detracted from performance. The zero weighting in the mining sector, where share prices
demonstrated exceptional swings, was a positive over the period as a whole, although a negative over the final quarter.
However, there were also some negative contributors amongst companies held. The holding in Amec Foster Wheeler, a company which provides project management services to the energy industry, weighed on performance. While I had expected that this business would be able to weather the industry downturn, it became increasingly clear that the scale of the downturn would make business for oil services companies difficult through 2016. Consequently, the holding in Amec, and also that in another energy services company, John Wood, were sold.
The holding in G4S fell over the period, despite good results and a management delivering on their turnaround plans. Ciaran Mallon, the manager, believes the valuation looks attractive and has added to the portfolio’s holding.
Next and Whitbread are two holdings which had recently delivered consistent positive performance. However, the past 12 months saw both disappoint, in a challenging retail environment. Next warned that it was facing the “toughest year since the 2008 financial crisis” and Whitbread blamed weak high street
footfall on lower sales at Costa Coffee. Both companies have business models that can withstand near term pressures and should create significant shareholder value in years to come.
Pearson has endured a bumpy ride over the past few years, as it migrates its educational business model to a digital proposition. Despite the sale of the company’s Financial Times business for an attractive price, the shares again underperformed over the year. They continue to believe that the company’s unrivalled positioning in the global educational market should stand it in good long term stead.
IVI : Invesco Income Growth suffers from discount widening