The £998m Invesco UK Growth fund run by Martin Walker (pictured) is chock full of traditional value names, with oil giants BP and Shell making up 15% of the fund and companies from traditional cyclical areas like financials and industrials dominating the portfolio.
A client presentation for the fund seen by Portfolio Adviser lists international value opportunities and UK domestic value plays as “key portfolio themes”, with companies in these areas accounting for 31% and 36% of the fund respectively. The remainder of the portfolio is divided into oil & gas (21%), mining (11%) and cash (2%).
Invesco UK Growth falls more on the value than the growth side of Morningstar’s equity style box. The methodology determines a portfolio’s style characteristics based on its underlying stocks and where they fall on the value-growth scale. Walker’s fund has a net equity value score of 52.47%, while 11.48% of the portfolio falls under net equity growth.
One source told Portfolio Adviser that renaming the fund to reflect Walker’s value play would make perfect sense. Like Voltaire’s description of the Holy Roman Empire, Invesco UK Growth is neither a UK or a growth fund, they said.
|Invesco UK Growth Top 10 Holdings (28/02/19)||%|
|Royal Dutch Shell||7.27|
|British American Tobacco||3.13|
FCA seeks consumer-friendly language
Asset managers have been under more pressure from the Financial Conduct Authority to use “consumer friendly language” when setting out fund objectives and to justify the benchmarks they use as targets or to gauge performance.
Subsequently there has also been more attention paid to fund names and making sure funds do what they say on the tin.
Neil Woodford’s flagship fund is one such vehicle that has been called out for not matching up to its equity income label. Though one of the stated aims of the fund is to provide income through company dividends, The Times found that the fund relies on just 26 of the 90 companies in the portfolio to generate its 4.1% dividend yield.
Commentators have similarly picked on the star manager’s legacy fund Invesco Income, which has been run by Mark Barnett since his departure, for not fitting the income label.
Neither fund is in the IA UK Equity Income sector, with Woodford’s £4.4bn fund being dumped from the sector last March, which AJ Bell head of active portfolio Ryan Hughes says is a clue both are thought of as more of an income and growth fund than an outright income fund.
7IM senior portfolio manager Peter Sleep agrees with the FCA’s efforts to make marketing as clear as possible arguing that some fund descriptors like “high income” and “income” could mislead retail investors.
“It is bad enough that many fund names include words like ‘accumulation’ or ‘Ucits’ which might confuse inexperienced investors, but then we add descriptors that are downright wrong,” Sleep says.
A handful of asset managers have renamed funds to make their strategy clearer prior to the regulator’s prompting. Both Royal London Asset Management and Schroders decided to scrap the names of their UK Special Situations fund and Monthly High Income fund respectively for monikers with ‘opportunities’ in the title.
Last year Waverton renamed its European Income fund to the European Dividend Growth fund, while Schroders also shook up its European Opportunities strategy, replacing the lead manager and rebranding to a ‘recovery’ fund.
Part of the problem in Invesco UK Growth’s case is that “the fund has a legacy name from some time ago,” says Hughes.
“The fund was launched in 1987 at a time when investors didn’t really distinguish between different styles in the way they do now,” says Hughes. “People have only really been thinking very clearly about growth and value probably for the last five or six years as they try to bucket managers and see how they perform in different ways.”
Hughes says names like ‘special situations’, ‘value’, ‘growth’ and ‘opportunities’ mean different things to different people, which is why it is important to “look beneath the bonnet and really understand how a manager does invest”.
Invesco said the UK Growth’s “long-standing fund name” reflects the fund’s objective to provide capital growth over time and noted Walker’s strategy of creating a diversified portfolio by buying shares below their intrinsic value has not changed since he took over the fund in 2008.
Hughes notes that Walker’s valuation-based approach has not been a huge impediment to performance, noting that the fund has performed broadly in line with the IA UK All Companies sector with returns of 85.3% versus the average return of 81.7%.
But he says if you were to look at the fund today when the fund is fourth quartile over one year and third quartile over three years “you would certainly put him in the value camp over the growth camp”.
Capital growth vs growth as a style
Peter Brunt, associate director, equity strategies, manager research at Morningstar says the Invesco UK Growth portfolio has “a clear value bias” which “could be seen at odds to the fund’s name in terms of investment style”. But he said that in the sense Walker is targeting opportunities that will offer capital growth rather than income, the fund’s name is correct.
Invesco told Portfolio Adviser that it does not believe the names of the Invesco UK Growth or Invesco Income are misleading to consumers and said it “has not to the best of our knowledge received any complaint from the regulator, investors or prospective investors as to the appropriateness” of either fund name.
Tilney managing director Jason Hollands said suggesting the fund names of Invesco UK Growth or Invesco Income “misleading” would be too strong.
“Buying undervalued shares in the belief they will re-rate over time is a perfectly valid approach to generating capital appreciation and one that has worked well at many points in time, though less so in recent years compared to momentum biased strategies or funds focused on quality growth stocks,” he said.
But he acknowledged that “if the UK Growth fund changed name to make it clearer that it pursues a value-driven investment approach, that would more visibly identify the approach on the fund.”
Fair but could be clearer
The ‘income’ in Barnett’s Invesco Income fund is “fair” given its focus on income and capital growth, say Hughes.
“For those people who want an income it pays an income and a market yield.” However, it is not an “out and out high yielder,” he says, noting the fund yields 3.5% which is in line with the market.
Brunt says while Barnett “does give greater consideration to dividend income in investments decisions” because of his decent weighting toward small-cap companies the name of the fund could be clearer through the addition of ‘& Growth’.
Close to 25% of the Income fund is invested in companies with a market cap below £1bn and 4.3% is currently held in unquoted companies.
Invesco already has an income and growth fund run by Ciarran Mallon, “which is why they have not changed it perhaps,” he adds.
Invesco told Portfolio Adviser like the wider fund management industry it continues to review fund materials to ensure the investment strategy and fund benchmarks needed to accurately describe the investment policy and objectives are disclosed to consumers.
“Invesco takes its responsibility to be fair, clear and not misleading seriously and would review the appropriateness of all fund names should substantive concerns be raised. In seeking to ensure that the interests of all investors are protected, Invesco would also consider the potential adverse impact and confusion for investors that could result in renaming and/or rebranding long-standing funds without clear benefit to our clients and prospective clients.”