Invesco: Positioning after the rebound

I wrote a blog on March 25th called “Positioning for the Rebound?” which with hindsight looks quite well-timed.

It feels a good time to follow up on that blog: markets look like they have exhausted themselves in the short term now that some indices around the world have fully recovered back to where they traded at the start of the year. As many commentators have noted, that seems completely inappropriate given the huge negative impact from COVID-19.

Interestingly, the bottom in our funds’ relative performance occurred more or less at the same time as the bottom in the MSCI AC Asia Pacific ex Japan Index (MXAPJ). Data from Bloomberg suggests the Invesco Asian Fund (UK) Fund has outperformed by just over 7% since March 20th, and by over 6% since March 23rd when the MXAPJ index bottomed. And yet the fund is still underperforming the index on a year-to-date basis, by a little under 2% gross of fees. Clearly, this fund has quite a high beta to this particular crisis, both on the downside and the upside.

It is worth mentioning that this sort of outperformance from a market bottom is something we have seen before in our funds – most notably in 2008/09 and in early 2016. This is not surprising as it chimes with our philosophy and process. We look to own stocks which are trading below our estimate of fair value; when the market as a whole gets really cheap, we are likely to find more stocks trading significantly below fair value, and the fund is likely to be full of those stocks when the market does reach a bottom. When the market eventually rallies, and stocks start setting off on their journey back to fair value, our funds do tend to benefit from that dynamic.

When we drill down to see the drivers of performance since the bottom, the most obvious thing to note is that there has not been any clear rotation. Some of the biggest portfolio winners in the last 12 weeks have been Mediatek, JD.com and NetEase, all of which would fall into the ‘growth’ category and all of which performed well for us in 2019. Even through the past couple of weeks when there has been a more notable rotation in global markets towards value, these three stocks have continued to produce the goods for us.

However, there has clearly been selective strong performance in the ‘value’ part of the market; in particular, we have benefited from the bounce-back in energy stocks – Woodside Petroleum in Australia is a top ten holding and is the fourth largest contributor to fund performance since the bottom.

Overall the message is that while it is possible that we have now seen most (or all) of the rebound at the index level, there is still a huge amount of scope to drive outperformance given the divergence in performance at the stock and sector levels. Just because our relative performance has been strongly correlated to market performance in the recent past, it does not mean that our future relative performance will exhibit the same correlation.

The most obvious action we have implemented in portfolios has been to take profit in JD.com and NetEase, and to re-invest the proceeds into non-financial cyclicals. JD.com was a 6% position in the fund at the end of March; the share price is up over 50% since, but it is now only a 4.2% position in the funds as we have progressively sold the stock. We have introduced new positions in Worley, an engineering consultant in the energy and chemicals sector; Posco, the largest steel producer in Korea, and Astra International, the largest seller of cars in Indonesia. We have been conscious to limit our exposure to banks as we feel both the short and long term outlook have been hurt significantly by COVID-19, and we feel more confident in other kinds of cyclical stocks (such as autos and energy, two sectors where we now have meaningful overweight positions).

There was already a value tilt to the fund, and this tilt has been accentuated by portfolio activity in recent weeks, but we have by no means used up all of our ammunition. We still have plenty of exposure in the growth areas of the market, not just because we want some element of balance in the portfolio, but more importantly because we continue to find these ideas attractive. We have in fact recycled some of the proceeds from selling JD.com and NetEase into Alibaba, given that stock has lagged and only trades on 20x forecast earnings for the year ending March 2022. Alibaba isn’t expensive by any means – the headline multiple disguises the fact that there are a number of promising businesses in the group (e.g. cloud, payments) but which currently make a negligible or negative contribution to earnings.

To give a bit of colour on sector positioning, while internet and technology have always been overweights for us, those overweights are now being rivalled by similar overweights in autos and energy. A rough guide would be that we have 5% overweights in each of those four areas. The main underweights are in consumer staples, banks, healthcare, utilities and real estate.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

The fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise.

The Fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk.

The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.

As a result of COVID-19, markets have seen a noticeable increase in volatility as well as, in some cases, lower liquidity levels; this may continue and may increase these risks in the future.

Important information

*All data is as at 31/05/20, sourced from Invesco unless otherwise stated. Performance figures are based on the Z accumulation share class. Performance figures for all share classes can be found in the relevant Key Investor Information Document. Fund and sector average performance figures are sourced from Lipper. Fund performance is shown in sterling, inclusive of income reinvested and net of the Ongoing Charge and portfolio transaction costs. Sector average performance is calculated on equivalent basis. The sector is the IA Asia Pacific ex-Japan sector. This is a Comparator Benchmark. Given its geographic focus the Fund’s performance can be compared against the Benchmark. However, the Fund is actively managed and is not constrained by any benchmark. Please note the MSCI AC Asia Pacific ex. Japan Index is not a target, constraining or comparator benchmark of the fund. The comparative information shown here is to illustrate the fund’s manager’s active investment approach.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.

This article is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

Please note the MSCI All Countries Asia Pacific ex-Japan index is not a target, constraining or comparator benchmark of the fund. The information shown is to illustrate the fund manager’s active investment approach and provide broader market context.

For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available on our website.