On 21 October I chaired an equities outlook webinar together with my colleagues in our Henley office. I was joined by Andy Hall, co-manager of the Invesco Global Equity Fund (UK), James Goldstone, co-manager of the Invesco UK Equity High Income Fund (UK), Ciaran Mallon co-manager of the Invesco UK Equity Income Fund (UK), and Will Lam co-head of the Asia and Emerging Markets (EM) team, and co-manager of the Invesco Asian Fund (UK).
Source: Invesco, Bloomberg, as of 30 September 2024.
The chart highlights that, from a historical perspective, the current 15-year period of US outperformance has been exceptionally prolonged.
Key drivers of this outperformance have been:
So the interesting task for Andy Hall, as a global equity fund manager, is the continuous appraisal of the maturity, the competitive environment and the evolving regulatory landscape of each of those Megatech's.
We got this same question in a number of different guises. The first thing to say is that the debate is more nuanced than the question! Our own Kenneth Blay produced a recent report analysing the data that shows that Asia/EM, International and Small Cap strategies continue to be able to garner assets and we have seen that with our Henley funds, too. Even in the US the data is more nuanced: US fundamental blend has really struggled but there have been growth opportunities in US growth, value and small cap.
I would argue that the outlook for our fundamental equity strategies is promising for the following reasons:
The fact that US outperformance has coincided with rising market concentration is unsurprising given the rise of the Mag 7 and, whilst this has continued this year, there are indications that the market is looking to broaden out:
The broadening out of the market indicates an increase in risk appetite; we have seen this with the increase of flows into our small cap strategies, in particular.
Rising concentration = rising correlations = more value from diversification
We analysed the fund performance and correlations of my three colleagues over the past three years alongside leading passive indices. These produced some interesting results:
Past performance does not predict future returns. For full performance tables click here.
Source: Invesco, Factset, 30 September 2024. Chart shows coefficient of determination (R2) of rolling monthly total returns in GBP, daily, since 30 September 2021. Magnificent 7 * = Mag 7 from 9th August 2023 onwards. From 30 September 2021 to 9th August 2023 calculations based on FTSE US Technology. Hypothetical portfolio A based on equal weights held as of 30 September 2021 in each of Invesco Global Equity Fund (UK), Invesco UK Equity High Income Fund (UK), Invesco Asian Fund (UK), and S&P 500. Hypothetical portfolio B based on equal weights held as of 30 September 2021 in each of Invesco Global Equity Fund (UK), Invesco Equity High Income Fund (UK), Invesco Asian Fund (UK), and Magnificent 7*
An interesting observation from James Goldstone was the low correlation of the Invesco UK Equity High Income Fund (UK) with the Mag 7. Striking too was the very low correlation of Will’s Invesco Asian Fund (UK) with both the S&P 500 and Mag 7. Furthermore, when we created two different hypothetical portfolios (A and B above) including a mix of our three fund managers and S&P 500 (hypothetical portfolio A) and Mag 7 (hypothetical portfolio B), we found that we were able to produce a compelling risk reward: Hypothetical portfolio A produced MSCI World type returns but with 23% lower daily volatility; hypothetical portfolio B produced S&P 500 like returns but with 31% lower daily volatility.
I found the above analysis interesting. Without trying to optimise returns in any way and even in a period of significant US outperformance, we showed that by combining passive (Mag 7 and S&P 500) and 3 of our active funds, we could deliver superior risk/reward through leveraging the lower correlation of some of our funds together with their ability to generate alpha.
So, what is the role of active investing? If an active manager has a consistent and predictable approach, an ability to generate alpha and/or the benefit of risk diversification, then active strategies can happily coexist with passive: It's active and passive rather than active versus passive.
In our February webinar, we posed the question to Will’s colleague Charlie Bond, “Is China the new Japan?”. He explained why he didn’t think that was the case with the main point of difference being the attractive valuations to be found in China and the earlier stage of development. More recently we have seen indications from China that they plan to introduce fiscal stimulus.
Will and Charlie’s colleague John Pellegry wrote an excellent blog in response to the initial announcement about China's fiscal stimulus program. Whilst we may lack some details, Will highlighted that we now have a catalyst for the China equity market and “it is as cheap as it has ever been”:
Clearly, a Trump presidency will pose challenges to China equity positioning; so if the bull is not yet in the China shop, he is having a good look through the window! And Will’s insightful comment was “you have to be there before it (the shift) happens”.
James noted that the UK economy and stock markets have been in a prolonged ‘funk’ since the Brexit vote in 2016, and arguably even longer dating back to the global financial crisis in 2008. However, there are encouraging signs that suggest an optimistic post-election outlook.
One interesting area where we are seeing an increase in investment is energy infrastructure. The National Grid has developed a five-year programme to invest around £60 billion in networks across the US and UK. This highlights a growing emphasis on infrastructure and long-term investments which could drive economic growth. Additionally, there have been investment opportunities in areas that have benefited from AI enhancement, such as in the data-driven firms LSE, RELX and Experian.
We concluded the discussion with a brief recap, but I couldn't let go of one unresolved client question. So, I posed it to Andy again for his final thoughts: "Will you make more money in the US or outside over the next year?" His immediate response was, "I’ve got no idea!" I expected nothing less. With Andy, as well as James and Will, you always get consistency!
| Standardised rolling 12-month performance | 30 Sept 2023 - 30 Sept 2024 | 30 Sept 2022 – 30 Sept 2023 | 30 Sept 2021 – 30 Sept 2022 | 30 Sept 2020 – 30 Sept 2021 | 30 Sept 2019 – 30 Sept 2020 |
|---|---|---|---|---|---|
Invesco Asian (UK) Z Acc IA Asia Pacific Excluding Japan NR* |
5% 7.59% |
17.66% 15.22% |
-0.36% -9.66% |
6.31% 0.46% |
15.54% 14.81% |
Invesco Global Equity (UK) Z Acc IA Global NR* |
-3.5% 7.38% |
30.39% 23.85% |
-1.41% -8.9% |
16.21% 7.48% |
22.77% 16.4% |
Invesco UK Equity High Income (UK) Z Acc IA UK All Companies NR* |
-27.44% -13.13% |
26.25% 32.5% |
-6.45% -15.5% |
13.45% 12.38% |
15.82% 14.24% |
Hypothetical Portfolio A |
19.69% |
11.76% |
-1.53% |
24.56% |
-6.29% |
Hypothetical Portfolio B |
26.11% |
16.90% |
-4.67% |
25.83% |
-1.86% |
Source: Invesco, as at 30 September 2024. Past performance does not predict future returns. Performance figures are based on the Z Accumulation share class. If a fund has not been in existence for the full period requested, the start date for all funds on the chart will default to that fund's launch date. Performance figures for all share classes can be found in the relevant Key Investor Information Document. Fund performance figures are shown in sterling, inclusive of reinvested income and net of the ongoing charge and portfolio transaction costs to as at date shown unless otherwise stated. Sector average performance is calculated on an equivalent basis. The standardised past performance information is updated on a monthly basis.
*These are Comparator Benchmarks. Given its geographic focus the Fund’s performance can be compared against the Benchmark. However, the Fund is actively managed and is not constrained by any benchmark. Many funds sold in the UK are grouped into sectors by the Investment Association (the trade body that represents UK investment managers), to facilitate comparison between funds with broadly similar characteristics.
The 2025 equities outlook is improving. Balance sheets look healthy, and many stocks are attractively valued, though geopolitical risks remain. Find out more.
Discover the potential of equal weight strategies and how they could offer enhanced diversification.
Markets were relatively volatile during the quarter, with investors being pulled between the negatives of geopolitics and weaker industrial demand, and the potential benefit of lower interest rates.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
Invesco Asian Fund (UK)
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. The Fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. The Fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk. The Fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the Fund. The Manager, however, will ensure that the use of derivatives within the Fund does not materially alter the overall risk profile of the Fund.
Invesco Global Equity Fund (UK)
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. The Fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk. The Fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the Fund. The Manager, however, will ensure that the use of derivatives within the Fund does not materially alter the overall risk profile of the Fund.
Invesco UK Equity High Income Fund (UK)
The Fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the Fund. The Manager, however, will ensure that the use of derivatives within the Fund does not materially alter the overall risk profile of the Fund. As one of the key objectives of the Fund is to provide income, the ongoing charge is taken from capital rather than income. This can erode capital and reduce the potential for capital growth. The Fund is invested in companies primarily domiciled in one country, any unfavourable conditions presented on them through country-specific conditions such as changes in regulation, business or economic policy may have a more negative impact on the Fund's performance than on the performance of a Fund that is geographically diversified. The Fund may invest in private and unlisted equities which may involve additional risks such as lack of liquidity and concentrated ownership. These investments may result in greater fluctuations of the value of the Fund. The Manager, however, will ensure that any investments in private and unlisted equities do not materially alter the overall risk profile of the Fund.
Invesco UK Equity Income Fund (UK)
The Fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the Fund. The Manager, however, will ensure that the use of derivatives within the Fund does not materially alter the overall risk profile of the Fund. As one of the key objectives of the Fund is to provide income, the ongoing charge is taken from capital rather than income. This can erode capital and reduce the potential for capital growth. The Fund is invested in companies primarily domiciled in one country, any unfavourable conditions presented on them through country-specific conditions such as changes in regulation, business or economic policy may have a more negative impact on the Fund's performance than on the performance of a Fund that is geographically diversified. The Fund may invest in private and unlisted equities which may involve additional risks such as lack of liquidity and concentrated ownership. These investments may result in greater fluctuations of the value of the Fund. The Manager, however, will ensure that any investments in private and unlisted equities do not materially alter the overall risk profile of the Fund.
Important information
This marketing communication is for Professional Clients only and is not for consumer use.
Data is as at 31/10/2024 and sourced from Invesco unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the financial reports and the Prospectus, which are available using the contact details shown.
Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
