A fund for which industry fashions are passé
Invesco Perpetual Global Equity Income’s Doug McGraw talks to Nyree Stewart about excluding whole industries from his portfolio
Most dividend-orientated funds would have some kind of weighting to the utilities sector, which is seen by many as a core source of equity income. The managers of the £256.11m Invesco Perpetual Global Equity Income fund, however, own no utilities.
As Doug McGraw (pictured), co-manager of the fund puts it: “We either think they’re too expensive, and generalising that would be the US, or in Europe we question the sustainability of dividends and balance sheet strength.”
Mr McGraw, who joined Paul Boyne on the fund in August 2011, admits this kind of high conviction bet is unusual for dividend-focused funds. Nor do the managers confine these types of views to utilities. The fund, which passed its third anniversary in March, also holds less than its benchmark index in financial firms, at just 10.27 per cent of the portfolio.
“That is really driven by banks,” Mr McGraw explains. “We don’t own any eurozone banks – we do own HSBC, but that is not a eurozone bank – and in general we’re underweight banks. Some of the financials we own are not balance sheet-orientated, like banks or insurance underwriters. [They’re] things such as Deutsche Börse and Aon. That underweight in financials has been consistent throughout the period of management.”
If these kinds of views sound familiar coming from Invesco Perpetual, it is because they are also common to other equity income funds in its stable. This high level of conviction in particular sectors – derived from bottom-up research on individual stocks – is also characteristic of Neil Woodford’s massive Invesco Perpetual High Income and Income portfolios in the IMA UK Equity Income sector, as is the aversion to parts of the financial services industry such as banks.
The team running the Global Equity Income fund researches the fundamentals and valuations of individual stocks on a bottom-up basis. It does not use the weightings of the benchmark index in particular regions, countries or industry sectors as an initial reference point.
“As far as objectives for the portfolio [go], we look for an attractive yield, a growing income stream, so we’re more focused on companies that can sustain or grow margins and can deliver increasing free cashflow and capital appreciation,” Mr McGraw says.
In terms of valuation, the team has three price targets for every stock, delimiting the returns they wish to make from it, the price they think represents fair value for the shares and a target for any losses which may be endured.
Of the three, Mr McGraw says the second is the most important. But he adds: “For us, having that downside target is very important. When we go into an investment, we want to make an active assessment up front as to how much we could actually lose, and that’s a very important part of the process.