Invesco: Staying focused after a tough 2018

Clive Emery, Multi Asset Product Director and Danielle Singer, Multi Asset Portfolio Manager

Clive and Danielle take a look at performance in 2018 and explain why they’re looking ahead with optimism.

The Invesco Global Targeted Returns Fund (UK) returned -3.01% gross in 2018 (-3.85% net). This performance was disappointing and meant our three-year annualized return was below our target. This was broadly driven by a low hit rate of ideas positively contributing over the year against what was a challenging backdrop with most asset types posting negative 2018 returns.

Markets were dynamic in 2018 with investors battling with a raft of geopolitical and economic contradictions. What started in January with one of the strongest US equity rallies in decades quickly turned to turmoil, with the beginning of February marking a return to volatility that continued throughout the year. By some definitions, equity markets were enjoying their longest ever bull run, however, the threat of an end to the era of extremely easy monetary policy meant progress was choppy. The stronger US dollar and higher US interest rates hurt sentiment in emerging markets and other risk markets, while further uncertainty was inspired by issues such as trade wars, Italian politics and the lurching Brexit process.

One of our top contributing ideas for the year was ‘Equity – US Large Cap vs Small Cap’, which performed well during the S&P 500 January rally and again later in the year when small caps underperformed during a momentary easing in trade tensions. Being long ‘safe haven’ currencies, such as the US dollar and the Japanese yen, was also beneficial, as investors proved skittish during periods of market volatility and macroeconomic uncertainty. Another currency idea that performed well was ‘Currency – Chile and Mexico vs Australia and New Zealand’. Mexican assets rallied strongly in July and September, having been helped by an easing of concerns around the new president and optimism over NAFTA trade negotiations with the US.

However, a number of ideas experienced outsized moves due to unexpected shocks and had a negative impact on fund performance. For example, our ‘Currency - Swedish Krona vs Euro’ idea had expected the Swedish central bank to raise rates when they reached their 2% inflation target, given a strong economic backdrop. Unfortunately, in part due to their stubbornly dovish stance, the currency experienced a five standard deviation move during Q1. Also, our ‘Commodity - Carry’ and ‘Commodity – Short’ ideas had short exposure to natural gas contracts, which negatively impacted the fund as natural gas prices rose dramatically in the middle of Q4. In ‘Volatility – Asian Equities vs US Equities’, the majority of the losses from this idea came during Q1. Here, the idea was negatively affected by the sharp move higher in the VIX index – a move not replicated in Asian markets. Lastly, our equity ideas were impacted by the strong decline in equity markets during 2018, in particular during Q4. 

While it is obviously disappointing these events chipped away at our hit rate and therefore our performance, we are reassured that the robust risk management process we have in place has meant that none of these individual events have had an exaggerated impact on the fund. By constructing a portfolio of ideas with different causations and correlations, we aim to ensure that no one market, asset class or event can dominate performance.  Equally, our flexibility to react to new information and our willingness to exit ideas – both when they have performed to target or have become challenged – continues to be an important discipline. Over a long time frame, the team have demonstrated their ability to generate positive returns from this ideas-based approach and we believe our philosophy and process provide a robust framework for achieving what remain sensible targets over the long term. 

For a more in-depth review of 2018, please download our full report.

Full report

Standardised rolling 12-month performance (% growth)

Past performance is not a guide to future returns. 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 performance figures are shown in sterling, inclusive of reinvested income and net of the ongoing charge and portfolio transaction costs to 31 December 2018. The figures do not reflect the entry charge paid by individual investors. Source: Lipper.

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 Invesco Global Targeted Returns Fund (UK) makes significant use of financial derivatives (complex instruments) which will result in the fund being leveraged and may result in large fluctuations in the value of the fund. Leverage on certain types of transactions including derivatives may impair the fund's liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the fund being exposed to a greater loss than the initial investment.

The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. This counterparty risk is reduced by the Managers, through the use of collateral management.

The securities that the Invesco Global Targeted Returns Fund (UK) invests in may not always make interest and other payments nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity for the securities in which the Fund invests, may mean that the Fund may not be able to sell those securities at their true value. These risks increase where the funds invest in high yield or lower credit quality bonds and where we use derivatives.

Changes in interest rates will result in fluctuations in the value of the fund.

Important information

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.

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 using the contact details shown.