Invesco Perpetual Select has published its annual report for the year that ended on 31 May 2016. The NAV total return of the UK Equity Portfolio over the year was -1.4%, which compares with the total return of -6.3% posted by the FTSE All-Share Index. The NAV total return of the Global Equity Income Portfolio over the year was -0.2%, compared with the MSCI World Index (GBP) net return of +0.7%. The Balanced Risk Portfolio returned -0.3% compared with the total return of +5.6% for its benchmark of 3 months LIBOR plus 5% per annum. The Managed Liquidity Portfolio performance continued to be affected by the ongoing low interest environment, with an NAV total return of -0.1%.
The board sets set targets for dividends of at least 6.15p per UK Equity share and at least 6p per Global Equity Income share and said that these dividend targets might require a contribution from capital. It transpired that this was necessary and the targets were achieved with contributions of approximately 0.3p per share to the UK Equity dividends and 0.5p to the Global Equity Income dividends. They intend to continue with this policy and have set the same targets for the year ending 31 May 2017. It continues to be the case that in order to maximise the capital return on the Balanced Risk Shares, the Directors only intend to declare dividends on the Balanced Risk Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust. For the Managed Liquidity Shares it remains the Directors’ intention to distribute substantially all net revenues earned shortly before conversion dates but, in consequence of the continued very low interest rates prevailing, the cumulative retained net revenue of the Managed Liquidity Portfolio continues to be minimal and, in view of the administrative costs, the Directors have not declared any dividends on the Managed Liquidity Shares since 18 April 2012.
UK Equity portfolio
Within the UK Equity Portfolio, against a highly volatile market back drop, the key contributors to the Company’s outperformance of its benchmark index were the holdings in the tobacco sector. All four of Reynolds American, British American Tobacco, Imperial Brands and Altria delivered strongly positive returns over the period under review, with Reynolds’ shares rising by over 55%. Reynolds concluded the purchase of US tobacco company Lorillard in June 2015 and the company is beginning to see the benefits of this acquisition, with cost and revenue synergies emerging from the process of integration. Dividend growth and profit margins remain healthy across all the tobacco majors, in spite of the continuing volume decline, driven by product innovation, tobacco quality improvements and cost rationalisation.
Also contributing strongly to performance were certain of the investments in the financials sector. In March, London Stock Exchange announced a “merger of equals” with Deutsche Boerse and saw its shares rise to a record high. Earlier in the period, Amlin, a Lloyd’s insurance market investment vehicle, agreed to a takeover from Japanese company Mitsui, resulting in a significant uplift to its share price. The share prices of Beazley and Hiscox, also in the non-life insurance sector, both rose on the back of positive results and amid growing takeover speculation.
The portfolio continues to avoid any exposure to banks, where dividend prospects are still uncertain, and mining companies, where the medium term outlook for metals prices is still problematic. The zero weighting in the banks sector impacted positively on performance, while the zero weighting in the mining sector, where share prices demonstrated exceptional swings, was a positive over the period as a whole, but a negative over the final few months.
Among the detractors to performance over the period was support services business G4S. The company has faced headwinds in its emerging markets businesses and from provisions for its “onerous” (unprofitable) contracts in the UK and from balance sheet concerns. The Manager believes the negative share price reaction has been unduly harsh, with the company well positioned to deliver growth from its bid pipeline in a challenging macro-economic environment.
TalkTalk Telecom announced that it had been the victim of a cyber-attack in October 2015. The shares were marked down in the weeks following the news, but stabilised later in the period as it was confirmed that the impact of the attack had been less than originally suspected.
Game Digital saw its shares fall sharply after an update on pre-Christmas trading, which confirmed that UK sales had fallen off sharply at the most critical time of year for the company. Sales of old format content have declined much faster than expected and, while sales of new generation content have remained strong, these were not enough to offset the fall. The company’s sales in the Spanish market have remained strong.
Rolls-Royce published a negative trading update in November, forecasting that 2015 profits would be at the lower end of expectations and that demand would weaken in 2016. With visibility of future earnings growth showing no signs of improvement, the Manager sold the remainder of the holding in the company, having reduced the position earlier in the year.
Also weighing on portfolio performance were the holdings in the travel & leisure sector, where sentiment has been overshadowed by terrorist events. Thomas Cook confirmed a challenging trading backdrop for 2016, although it has moved much of its summer capacity to the Western Mediterranean. EasyJet reported a reduction in revenue per seat – with the Paris bombing and the French air traffic control strikes having a short term impact.
Global Equity Income
Performance of the Portfolio lagged the benchmark MSCI World index over the 12 months, largely due to its underweight exposure to the US and overweight exposure to the UK and Europe.
An overweight exposure to UK equities detracted from returns, in part due to the challenging market conditions faced by FTSE 100 companies. For the year to the end of May 2016, the FTSE 100 Index returned -7.23% (total return). In particular, declining commodity prices and a slowdown in manufacturing took its toll, whilst financials were subject to repeated market volatility. Looking at Europe, both the relative overweight exposure and stock selection in the region detracted from overall returns. This was mostly due to exposure to European financials, which continued to struggle in a low interest rate environment.
The Portfolio’s relative underweight position in the US, which strongly outperformed the broader benchmark index as the economy regained its momentum supported by stronger core economic data, was a limiting factor. Whilst overall US equity market valuations continued to appear stretched to them, careful stock selection was a positive for portfolio returns. Rising consumer confidence, a
strong housing recovery and an improving labour market helped to support greater discretionary spending. A number of their US equity holdings were among the top individual contributors to returns, such as Microsoft, Chevron and Philip Morris International. Asia (ex-Japan) exposure outperformed the regional component of the reference index due to strong stock selection.
At the sector level, the Portfolio’s overweight exposure to the energy sector detracted as the oil & gas industry experienced continued pressure. However, this started to reverse towards the end of the period. Stock selection in the financial (which have been subject to repeated market volatility), industrials (impacted by a downturn in commodities) and utilities sectors also detracted from returns. Whilst exposure to the healthcare sector marginally detracted from returns, stock selection, such as a holding in Novartis AG, which they believe continues to offer a healthy dividend, was a positive as the position outperformed the benchmark index return in this sector.
In contrast, strong stock selection in consumer staples, with holdings such as British American Tobacco, Kellogg and Philip Morris International, as well as in the cyclically-geared consumer discretionary and materials sectors proved beneficial as both strongly contributed to the Portfolio’s performance. Overweight exposure to telecommunication services, exemplified by their holding
in China Mobile, a dominant mobile operator in China with clear opportunities to grow its earnings, was also a positive. Stock selection within information technology was a positive and contributed relatively strong performance versus the benchmark index, but was offset by being underweight in this sector.
IVPU / IVPG / IVPB / IVPM : Invesco Perpetual Select results