Invesco Global Equity Core Fund strategy update

Hello and thanks for watching our latest update on global equities. Today I'm joined by fund managers Andrew Hall and Emily Roberts. We'll be discussing fed cuts, AI, China and all the things that are shaping their positioning today. Andy we just had the latest fed cut recently. How has that changed your view on equities going forward?

Andy.

Well truthfully it hasn't changed anything we do. We try and make every effort to avoid basing any investment decisions on what's going on in terms of politics or macroeconomics. And interest rates are obviously one component of that. I think what we'd say is that the beginning of this rate cutting cycle has probably been anticipated by the stock market now for at least six months. So it really hasn't come as that much of a surprise to investors. What it is beginning to do is, is change the internals of the market. So for example, some areas of the market that have been somewhat out of favour in a higher interest rate environment. So businesses that carry more leverage like utilities or real estate, they've begun to perform a little bit better. Smaller companies have done somewhat better versus the larger companies, again, because they tend to carry more leverage and tend to be a bit more sensitive to the economy. So there's definitely been some internal shift within the market. And that's at the margin. It's taken the edge off the leadership of the big Mega-cap Mega-cap tech platforms as far as what we're doing. I mean, look, we continue to have a diversified portfolio of superior businesses with strong balance sheets. Some of what's going on today in terms of this shifting dynamic within the market is a bit more of a headwind in terms of performance for us, but we're continuing to find opportunities in a broad array of industries and sectors and also and also geographies.

Emily.

And I'd point out it's really difficult to monetize macro predictions even if you get the macro prediction correct. So if we have a quick thought experiment, if we rewind back to the beginning of 2021, and I told you that US mortgage rates were going to go from below 3% to reach to reaching 8%, you probably would have wanted to short the US homebuilders. And actually you would have been very underwater in that in that trade if you had indeed done that. So that is why we think it's incredibly important to remain focused on the bottom up and the process that we employ every day.

Sid.

Yeah, I think that's right. You would have been carried out if you were short home builders in 2021 and moving on to AI. We've seen strong performance in Nvidia this year. Is that a theme that you think can continue? How are you guys playing it and how do you manage the Nvidia risk?

Andy.

Well, I think the first thing to say is we don't play anything. We try and stay away from thematic investing. We often find that thematic investing tends to attract price insensitive buyers, and we try and remain very disciplined in terms of the price we pay relative to the the intrinsic value that we estimate for a company. So so first observation is we try and stay away from getting sucked into those thematic bubbles. I think artificial intelligence is important, and I think it's here to stay. And I think we are in the relatively early innings of artificial intelligence shaping our world. And so, you know, when I think about it from a consumer standpoint, you know, can I envisage a year or two from now, are our iPhones having some kind of advanced AI assistant capability, which would support us in managing tasks and so on and so forth. I absolutely can and then from an enterprise side, you know, it's conceivable that we do, you know, spend more time using Copilots. And we can already see for businesses like Reed-elsevier, which we own in the fund, they are already beginning to monetize artificial intelligence, add ins that are supporting lawyers doing their work, making them more efficient. So to us, I think it is clear that artificial intelligence is going to become a more important area going forward. It is going to drive growth, the risk. And I think what sort of concerns us just from a risk management perspective is expectations are high and these use cases might not come through that quickly. And if they don't, there is a risk for some businesses, certainly within semiconductors, that we have to endure some kind of an air pocket. And that's the risk that as active managers, we're trying to calibrate.

Emily.

And I'd say from a process perspective, we have something quite interesting to say about managing that risk as well, which is that we have models for all of the large benchmark weights that are not owned within the fund. And we consider them to be shorts. And actually, this leans into Andy's background, working for a specialist short seller at a hedge fund. So where we have either an underweight position or no position at all, we still have a model that we update actively and we watch daily. And therefore, when the asymmetry in some of those stocks looks more favorable than what we own, we're able to act quickly on that. And that, from a risk management perspective, is something that we find incredibly useful.

Sid.

Now, how have you managed your Nvidia position as the years gone on? Have you done anything through the year, or have you sort of kept it where it was at the beginning?

Andy.

Well, if you go back to 2021, when we first bought the shares, we identified, you know, a superior business run by a highly talented and aligned founder in Jen-hsun Huang. And we felt that there was a huge opportunity for the business to potentially take advantage of this change in process of computing workloads within data centers. Historically, that work, those workloads have been done using so-called CPUs, which businesses like Intel have tend to tend to dominate. And there was an opportunity for Nvidia to come with a better, um, gadget if you like to compute those workloads more efficiently. And when we first bought Nvidia back in 2021, you know, they were only 1 or 2% penetrated into the global data center estate. As we sit here today, that penetration has risen rapidly. And that's been catalyzed, if you like, by this emergence of generative AI as a new technology with with all of these new use cases proliferating. And so I think the shares have obviously gone up a lot since we bought it in 2021, you know, about five fold. But the earnings power of the business has also risen by a similar quantum. So broadly speaking we think, you know, the direction of travel for Nvidia has been rational. The thing that occupies us is that having known Nvidia for a long time, we know it to be a cyclical business and occasionally it does endure air pockets And going back to the point we made earlier, if some of these use cases don't come through as quickly as expected, there's definitely a risk that Nvidia endures an air pocket. So more recently, we have moderated our position size in Nvidia to reflect that risk.

And moving on to China, we recently got an announcement by the government that they're going to be adding stimulus to the market and supporting the economy more broadly. Has that changed your view of China at all, and in terms of positioning, have you been doing anything there?

Emily.

So the market has quickly rerated the Chinese stocks, which were on very close to their all time low PE levels. If not, they're at about eight times for MSCI China that rerated quite quickly on the back of the stimulus announcement to more in line with the long term, long term average rating. And what what we know is that global funds were very underweight China. And this indication from the government that they're taking action was certainly a trigger to to manage that position for, for global funds from here. However, as we've seen since, the market is grappling with how sustainable and how successful the stimulus may or may not be, and that's certainly something that Andy and I would not claim to have a strong edge on. As Andy's already outlined, we don't make macro positions in the fund, but at the same time, China is 2% of the global benchmark, um, benchmark and China's much, much larger proportion of global GDP. So we have to manage our exposure to China. And consciously, we have spent a lot of time taking these macro headlines and translating them into what they mean for the stocks that we own and don't own from a bottom up perspective, and b that in the luxury sector or otherwise. And what what we're debating is how to navigate the sort of cyclical downturn in China and whether or not to factor in any structural change in the longer term to the Chinese the behaviour of Chinese corporates and the behaviour of Chinese consumers. Another factor that we have to take into account is geopolitics and what that means for both local Chinese businesses, but also global companies who might want to be selling their product into China. And a couple of examples of that might be ASML and also the cognac businesses. Andy, is there anything you would add?

Andy.

I think the thing that's changed, perhaps, in my investing lifetime, is that China has gone from a source of opportunity for most international businesses to a possible source of competitive threat. And so, again, going back to the point about active management, this is going to be an important time to form judgments on those individual businesses and industries. How can they adapt to that changing competitive landscape. And certainly in areas like semiconductors, for example, we're now seeing really credible new Chinese competitors emerge. And so figuring out how that landscape evolves is going to be quite important going forward.

Sid.

And you guys talked a little bit about shorting and Andy's shorting experience and how that's shaped risk management. I think I heard a few bits about behavioural biases in there as well. And Emily, I listened to a podcast recently where you discussed this in quite some detail. Can you outline some of the most common behavioural biases that investors have, or that that you're aware of, and how do you manage those within within the team and in the process?

Emily.

Of course. So this is something that we spend a lot of time thinking about as a team. And we're very introspective as a team, and we spend a lot of time looking at our mistakes of the past. What biases might have been driving some of those mistakes, and how we can shape our process to try and systematically reduce the errors that can come by from behavioral biases. And so if I give a few examples of those, perhaps we start with attention bias So if you're looking at a new a new idea, it can be quite easy to focus on all the exciting parts about that business. Why you might want to own it. We have templates in our in our process, our determined template, and our evaluate template, which have standardized questions which make sure we ask about every part of that potential investment thesis to avoid any blind spots from either confirmation bias. When you're only seeking out supportive evidence for the investment thesis, or attention bias, where you're only looking at the sort of exciting bits. And we've also spent a lot of time thinking about how to manage our call discipline. And in particular, loss aversion bias, where you want to avoid crystallising a loss and and endowment bias where you have a view that just because you've owned something for a long time, it is better than what is out there. And so we can we can talk in much more detail about that. But we've introduced thesis breakers to our process, where we outline exactly why we might want to sell a share before we've even bought a single share in that business. That's very helpful to help us identify when a thesis creep might be occurring very early in act ruthlessly upon it. And but self discipline, I think, is one of the the key areas where where one can be vulnerable to behavioral biases. And we've done a lot of work.

Sid.

Can you maybe give us an example of a stock that you sold, you know, where a thesis breaker was sort of triggered I guess.

Andy.

Yeah. Well, one one example was Nike, which we bought back in 2021. And at the time we felt we'd identified a superior business run by a trusted management team with a strong balance sheet And we waited patiently for an opportunity to buy what we thought was a fair price. And not long after we bought the shares, we spotted a couple of things where maybe our initial investment thesis was beginning to change. We noticed that management changed or made a number of strategic decisions which on the face of it, had merit. One of those was to change their approach with how they distribute their product. And so, for example, they stopped using wholesalers like footlocker, certainly not to the same extent. And although that was a was a good strategy from the perspective of having a direct relationship with the customer and it's potentially margin accretive. What worried us was it potentially created an opening for competitors such as On Running and Hoka to exploit. And while we didn't recognize the risk as being an immediate threat, it certainly caused us to to worry. And as a result of that, we did a complete re-evaluation of our investment thesis and actually ended up selling the shares, which, although perhaps wasn't perfectly timed as an exit, we did in the end, avoid crystallising what could have been a much more material loss.

Emily.

I think what's also quite important to recognize is that team culture is incredibly important when it comes to all aspects of the process, but in particular self discipline. We're in a business where if we're doing well, we're going to maintain a 6,065% hit rate, and that means that 40% or so of our decisions are going to be wrong, and we need to minimize the loss on those decisions. And in order to do that, you have to identify when you're wrong quickly and to have a team culture where you're able to speak up as soon as you see a potential thesis break or thesis drift is incredibly important, because without that, you can't quickly identify the stocks that you do need to sell and move on. So I think the way we've structured the team and the team has been, has evolved over the last decade, has really been a very conscious effort to nurture that very special culture, to make sure that all individuals on the team feel safe to speak up as soon as they think something has changed.

Sid.

It's quite interesting because obviously we've talked a lot about mistakes. Um, how do you assess performance? How do you think about it? Is it just alpha attribution? What are the ways you dig into that?

Andy.

Well, performance is not something that you can control. Unfortunately, the only thing you can control is, is making sure you give yourself the best odds of making consistently good decisions. And so to Emily's point, it really comes back to that willingness to be open minded about where we may have made a mistake and acting if we have. It comes back to the willingness to think about our process being introspective, adapting our process to make it better if we think there is an opportunity to do so. So I think it comes back to culture. As long as we maintain that culture of being open minded, willingness to accept challenge, willingness to adapt and make improvements, then I think we can continue to make good decisions. If we continue to make good decisions, ultimately, we think performance will follow.

Emily.

And this is something we've formalized as a team in terms of the adaptive nature of our process. We have a formal off site once a year where we take time away from the desk to reflect on all of the decisions we've made that year and beforehand. And we look at the sell decisions, we look at the buy decisions, but we also look at the stocks we've assessed and decided to not include in the portfolio. And the idea here is to assess whether there's any systematic bias, systematic mistake that we are making and attune our process to try and limit that. We also work with a third party provider called Ascension Analytics, and they've been a third party, a third set of eyes, if you like, on our process to help us identify where they think we could make improvements.

Sid.

And finally, and you might not like this, but what's your favorite stock in the portfolio today?

Emily.

Said you might not like my answer but we don't really think like that. We don't tend to have a top pick going into 2025 or a top three ideas. We deliberately set up the portfolio to be quite meritocratic. We know that our hit rate in the past has been strong, and we want to let our stock picking do the talking, and it's very difficult to identify ahead of time which of the stocks are going to be the ones that are contributing to the alpha. And we have assessed we have 18 stocks over the past three years who have provided over 100 bips of alpha to the to the portfolio, and that is deliberate. We set up the fund to have a diverse range of contributors, and therefore, I'm afraid I can't answer your question because it wouldn't be honest.

Sid.

Thanks, Emily. Thanks, Andy. Thank you for the insight you've provided for our viewers today. And thank you guys for watching us. I would say if you want more insight into our strategy, please read our owner's manual. It's a deep insight into the fund and the strategy written by the fund managers themselves. And also we've just released our latest quarterly letter which provides more insight into positioning and performance. Thank you.