EuropeanNov 30 2015

Fund Review: Invesco Perpetual European Equity Income

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This £538m fund was launched in December 2007 and Stephanie Butcher took over as manager around five years ago.

She points out its objective is to deliver income and long-term capital growth while adopting a valuation-driven philosophy.

Ms Butcher says the team is agnostic about style, country and sector allocation, preferring instead to “move where the valuation is taking us”.

She explains: “When we looked at where you get yield, this can change quite a lot over a cycle. At various points a defensive yield works well, at other points more cyclical dividend growth works and you quite often get strong valuation signals to move between those two areas. For instance, right now I think the valuation is very much pointing towards more cyclical, financially driven yields rather than some of the more defensive sectors.”

The manager believes the philosophy of income investing “is a good one for investors”. She continues: “If the yield is going to be sustainable, I think one of the mistakes people can make is to look at absolute yields and conclude that it must be an interesting company. The problem is are they actually going to be in a position to pay that yield?

“We spend a lot of time looking at a number of factors – [such as] ongoing cashflow – but also trying to look [ahead] on a two- to three-year basis and [ask] what are the drivers for that cashflow moving forward?”

Ms Butcher acknowledges the macro environment often creates the valuation opportunities she seeks, and the European sovereign debt crisis of 2012 is a perfect example of this, she notes. “Once you got to a point of believing the European Central Bank was going to keep the European project going, you could then look at valuations. The market had shifted to heavily derating anything that was domestic Europe [or] periphery, and financially linked or cyclical, and had rerated the more defensive areas and global growth.”

This created plenty of valuation opportunities, where she found “perfectly robust” businesses in Spain and Italy that had been overlooked. The manager believes something similar is happening in Europe in the wake of quantitative easing. “Quality has tended to get more narrowly defined as [consumer] staples and pharma, and not much else,” she says. “I’m not struggling at all to find yield in the European market, but I’m not finding it in staples.”