Fund in Focus - Invesco UK High Income
Who is Nevile Pike and what is your role at Invesco?
I am Product Director in the UK Equities team here in Henley. Product Director – I sit in the Investment team – in the UK Equities Investment team. I participate in all the meetings with companies and with analysts that come through, but I don’t have portfolio responsibility. My primary responsibilities are for communication and to enable the fund managers to do what they need to do -which is actually manage the funds.
What are the funds investment objectives?
The objective of the High Income Fund is to achieve both income and capital growth over the long term.
Now, that long term is important. In order to do that, we are investing in undervalued businesses which we can look to hold for the long term, not just undervalued businesses per se, but also businesses particularly that can both maintain and grow their dividends. The growth in dividends is a really important feature of the funds that Mark Barnett manages. Receiving and reinvesting of dividend, I mean, sometimes gets forgotten by investors - the importance of this to total return. People just look at share prices. But if I look over the last 10 years of the total return that you get from investing in UK equities around 60% – just over in fact – of that total return is actually from the dividends that you get from stocks and the reinvestment of those back in the company. So that long term growth in dividends is a really important feature of Mark’s portfolios.
Why should investors consider UK Equities funds in their portfolio?
To be honest, in my 35 year career in the City, I honestly can’t remember a time in which UK equities, and particularly UK facing companies, were as unloved as they as they are now. It’s almost as though post-referendum, with uncertainty that there is and pending getting some greater clarity - whichever way things go - that in that climate of uncertainty, the big global investors… Well, the UK – almost falls into the ‘too difficult’ camp. So, there are some great quality, highly cash generative UK companies which look extremely attractive to us. Now, an alternative to investing in equities might be bonds and if I look at the yield return that I get on equities compared to bonds – well, I mean relative to government bonds then the – the yield that I’m getting looks more attractive in – on equities than it has done since 1918. There have been a number of analyses on that which I’m sure you’ve seen in the papers recently.
But, actually narrowing it down, comparing corporate equity yields to corporate bond yields the return that you’re getting from equities is looks really attractive. It’s grown consistently over the last 10 years as this sort of nervousness… First of all, I think it started off - frankly, in the middle of a decade with nervousness about Europe as a whole - and I guess in 2013/14, it was more around Grexit than Brexit. But, with that nervousness about Europe, it seemed to build - particularly post the referendum - nervousness towards the UK; just compelling opportunities for cash flows out of the UK which, as I say, I haven’t seen before.
What are the advantages of holding this fund?
The short answer is that over the long-term the funds have performed really very well and I’ll expand on that. The short-term, particularly since the referendum in June 2016, has been more challenged. However, thinking broader, this is a long-term fund and it’s really important that investors understand that. In addition, it's also that they understand the risk – the particular type of risk - and the characteristics of the fund, and clearly talk to your investment adviser on that.
But looking at that long-term, I'll take you back to 1997 – the start of Mark’s career with Invesco, or Perpetual as it was then. £100 invested in January 1997 would now be approximately worth around £750. So that is a compounding return of 9.7% per annum. If that same £100 have been invested in the All Share then that would now be shade over £400 - the return on that is 6.7% per annum compounding. So, it is a great long term strategy. The risk, if I measure the volatility of those returns over that period, has been less than the index as well. So, long term, it has been an outstanding performer.
The challenge, though, has been more of the period since the referendum. It is a UK equities fund. It is a UK orientated UK equities fund. I’ve talked about how the UK equities and particularly UK facing equities have fallen out of favour and that has been headwind to the fund over that period. What’s really important for investors, I think, from here is that the process and the principles that have been behind that long term performance have remained intact. The principles that have held true over that long-term are still applied today. Right now, with the disconnect that we see terms of valuations and the negativity towards the UK, then we are clearly optimistic about long-term prospects going forward.
What are the long term prospects for the sector?
The unknown, I guess. Indeed, unknowable at the present time, is the timing of the resolution of uncertainty around UK politics and the process of leaving the EU in whatever form.
Now, we’re not making any judgement on what the form that exit might take, nor are we taking a particular view on what is the right option in that regard. What we do firmly believe, however, is that so much negativity is already priced in and there’s a stasis.
There is a complete inertia on behalf of investors, so much so that they’re not really prepared to make any kind of decision whilst there's such a degree of uncertainty. So, once we get some degree of clarity, whatever the form of exit from the EU or not may be, then investors will have a basis for making a decision. Furthermore, once we get that, we truly believe that the long overlooked UK businesses we see generating cash will be better recognised. And, frankly, if markets don’t do that themselves then the cash flows will remain attractive and we think that there will be M&A activity or private equity interest, which will come into stimulate that rerating.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual’s appetite for risk means that the advice for one person may not be the same for everyone. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding at 09.07.16