Fund Review: Invesco Perpetual European Equity Income

She explains: “It is very much investing with the philosophy of looking for companies that can provide income. What we find is at various points in the cycle that gets reflected, clearly in dividend yields going up, but also in that the market can react to that in advance.

“Last year was a good example of that, where you saw lots of companies where the markets suddenly realised that certain sectors would be able to see cash improve or capital build up that would put them in a position to pay decent yields, and often you see the stocks react in advance to that.”

For example, at the start of 2013 the forward estimate of the yield on the fund was 4 per cent, meeting its target of at least 110 per cent of market yield, but as the market re-rated many stocks, in hindsight the trailing yield did not look as exciting, but the capital return was close to 40 per cent. In spite of the income objective the fund’s key investor information document puts the fund at a level six out of seven. Ongoing charges sit at 1.69 per cent.

With a longer-term view of two to three years, a key part of the investment process is a focus on valuations. Again, the manager is agnostic about which sectors, countries or types of company it comes from as long as the companies can grow their yield.

In 2011, for example, the fund held classic, quality, defensive assets such as Unilever and BMW, because at the time the team felt they were cheap for what they were. But as the market re-rated them through the sovereign debt crisis, Ms Butcher explains that areas such as the periphery and financials were “what got very cheap and very attractive to us”.

She adds: “Really since the beginning of 2012 we have built it more aggressively. Throughout 2012 we were coming out of the more traditional defensive assets that we felt were getting very expensive and switching more and more into financials, initially through insurers, and then cycling into 2013 we went overweight banks, and we’ve been overweight periphery, particularly Spain. That hasn’t really changed.”

She points out that valuations, on a cyclically adjusted basis to take into account the low earnings levels, suggest these areas are the ones with the most upside in terms of earnings revisions and cash generation.

“Where the market still looks expensive is some of the consumer staples, which are the areas people would more traditionally associate with income funds. We don’t think you’re really being paid for these. In fact you’re almost beginning to take on risk in paying the multiple you have to pay. They are great companies, but not particularly exciting from a valuation or from a dividend growth perspective.”

For the five years to July 29 2014 the fund has significantly outperformed the wider IMA Europe excluding UK sector, with a return of 76.25 per cent against the peer group average of 63.16 per cent. Figures from FE Analytics also show the fund has outperformed the sector across one and three-year periods, including a one-year return of 14.02 per cent.

While macro has played an important part at times in the past five years, particularly during the sovereign debt crisis, in general the focus is on stock-specific opportunities.

The manager adds that now Europe is back from the brink, one of the surprising developments is how well some of the defensive sectors, such as consumer staples, have continued to hold up in the face of earnings downgrades. “I’m surprised we haven’t seen more of a derating in those areas. It is kind of frustrating as you would hope it would happen and would create opportunities. I still think it will happen, it will just take more time.

“If we found a company at the right valuation and earnings going up and it happened to be a consumer staple we’d be happy to own it, but it is difficult to find at the moment.”

Expert view

Ben Willis, investment manager and head of research, Whitechurch Securities

Verdict

This fund has had a stellar couple of years due to its portfolio positioning. Manager Stephanie Butcher has focused on the domestic recovery in Europe, investing in undervalued stocks in the peripheral countries, notably Spain, while benefiting from the demand for yield also. Despite the fund’s recent strong performance, it’s not too late. If you believe that Europe is in recovery mode, then this is a good fund to choose.