Invesco Perpetual UK Smaller Companies
Invesco Perpetual UK Smaller Companies Summary Invesco Perpetual UK Smaller Companies (IPU) is an unusual trust, investing in small companies which are traditionally the preserve of growth investors but also offering an income which is among the highest in its peer group, and competitive even with trusts in traditional equity income sectors.
Assuming these proposals are enacted, those tendering will bear an exit charge of 1.5%. Shareholders tendering in excess of 40% may be able to realise those shares to the extent that others do not tender, as well as the corporate broker trying to match shareholders wishing to sell with other investors seeking an increased investment in the company. A further range of options will be offered to shareholders around the time of the 2020 AGM. 100
The managers aim to achieve above average performance with below average volatility, and over the past five years have broadly achieved this. IPU marginally underperforms in sharp upward moves in the market, but tends to outperform when markets turn sour. Part of the reason for the strong long term performance can be attributed to the disciplined investment process followed by the current management team of Jonathan Brown (pictured) and Robin West, who at all stages throughout the cycle aim to invest in high quality companies. In 2015 the board announced steps to significantly increase the dividend by distributing 100% of available income each year through the payment of a small proportion from capital profits, and thus the shares currently yield 3.5%. This compares very favourably relative to other small company funds and trusts, but also those in the equity income sector.
50
0
-50 Jul, 2014
Jan, 2015
Jul, 2015
Jan, 2016
Invesco Perpetual UK Smaller Companies plc
Jul, 2016
Jan, 2017
UK Smaller Companies
Source: FE
Portfolio The investment universe for the managers is the FTSE 250 and smaller companies, including AIM, although they will not invest in a company with a market capitalisation of less than £100m. As the graph below shows, the trust is underweight companies above £1bn market cap relative to the index, and overweight those smaller than £500m. We understand that this places it broadly in the middle of the pack relative to peers – neither too heavily weighted to mid-caps, nor over-exposed to micro-caps. Invesco Perpetual UK Smaller Cos Market Cap Breakdown
40
30
%
The enhanced dividend payment has had a beneficial impact on the discount which has narrowed, and the shares currently trade on a discount of c 4% which is significantly narrower than the peer group. Whilst the risks to the discount are there over the medium term, the promise of a further exit opportunity in 2020 as well as the potential for buybacks between now and then may help to mitigate them.
50
20
10
0
Recent corporate update As we discuss in the discount section, the board’s actions helped successfully bring the discount in through two structural initiatives – promising one of several options to shareholders on or around the date of the annual general meeting in 2017, as well as more latterly an enhanced dividend policy. Last month, the board announced that after consultation with major shareholders, it has resolved to provide the opportunity to tender for up to 40% of the company’s total shares in issue, to be voted on at the AGM on 8 June.
>1.5bn
1-1.5bn
IPU (% invested)
500-1bn
100-500m
0-100m
Numis Index Highcharts
Source: Invesco Perpetual, Kepler Partners
In terms of shape, the portfolio typically comprises around 80-90 holdings – neither too concentrated nor too diversified and no position is allowed to get much bigger than 3% of NAV (currently only one holding is greater than 3% - JD Sports at 3.15%). The team currently monitors around 500 companies out of a possible universe of 2000. From this, the managers try to pick businesses which have robust and scalable business models, often niche
This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
1
www.trustintelligence.co.uk/investor
02.05.2017
businesses with significant growth potential, possibly a growing market share and are cash generative with an ability to re-invest. They steer clear of businesses with any form of pension issue. Ideally they want to see businesses have the potential to double in size in the next five years, and in typical Invesco Perpetual style, hold them for the long term.
which is designed to help them be more active users of gearing than in the past with the aim of introducing gearing during periods of sustained momentum. The managers are also, if they see fit, able to reduce exposure by hedging the portfolio using FTSE 250 futures. Given the illiquidity of this instrument, they expect to use this very infrequently.
The managers try to have a balance of themes within the portfolio and split companies according to what they view as “self-help” stories (Coats Group, Johnson Service Group), businesses that can roll out successful concepts or act as consolidators using their concept (CVS, JD Sports), and “structural growth” businesses (4imprint, Boohoo).
Returns
As a result of the managers’ stock selection preferences, the portfolio (on average) typically trades at a premium valuation to the wider market, which in the view of the managers is justified given the balance sheet strength and quality of underlying earnings. This is a pure stock picking fund, but it is perhaps noteworthy that relative to the index the trust is heavily underweight financials and overweight Technology and Healthcare.
IPU has generally underperformed sharply rising markets, and outperformed falling ones, and also outperformed in more moderate market conditions. The team say they aim to deliver “small cap outperformance with lower volatility” through their investment approach. The graph below, in which we break down the performance of the trust relative to the benchmark on a calendar year basis, shows that IPU has in the past followed this pattern relatively tightly. They have achieved this because of the managers’ aversion to higher risk stocks, but perhaps more importantly, the consistency with which they apply their investment process. IPU: discrete annual NAV total returns rel. benchmark
Invesco Perpetual UK Smaller Cos
80
Sector Breakdown 60.7
40
Annual NAV % (TR)
60
%
30
20
10
42.1
40
35.1
36.9
28.2 29.9
27.7 28.5
20.3
20
13.8 10.6
11.1
3.6
0 0
% portfolio
Source: Invesco Perpetual
ec hn ol og y
2009
T
s
Fi na nc ia ls
Ut ili tie
ria Co ls ns um er G oo ds H ea lth Co Ca ns re um er Se rv ic es T el ec om m s
ria ls
G
at e M
O il &
Ba si c
In du st
as
-1.9 -6.6
-9.1
-20 2010
2011
2012
2013
Invesco Perpetual UK Smaller
2014
2015
Source: Morningstar
% Index
2016
Numis SC Ex IT Highcharts
Highcharts
A third of the portfolio is invested in the highly diverse industrials sector. Around a quarter of the portfolio is invested in the consumer goods and services sectors. There is some concern regarding consumer spending in the wake of Brexit, and although the sector had a poor 2016 in general, it was a strong contributor to the portfolio last year due to stock selection ideas such as JD Sports.
The end result is that through the cycles, the team has established a decent track record. The graph below shows that over the past five years to the 9th April, for example, they have outperformed the benchmark and peers. However, the trust has Invesco Perpetual UK Smaller Cos: Performance vs indices last 5 years 150
100
%
Gearing The managers have authority to gear the trust to the lesser of 30% of net assets or £25m. However, this is a relatively conservative strategy, and it is therefore not surprising that the managers expect to use gearing only in modest amounts, and even then not often. The team have a market scoring system,
50
0
-50 2013
2014
2015
Invesco Perpetual UK Smaller (Cum Fair NAV) Morningstar IT UK SMC (Cum Fair NAV)
2016
2017
Numis SC Ex IT (Cum Fair NAV)
Source: Morningstar This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
Highcharts
2
www.trustintelligence.co.uk/investor
02.05.2017
Dividend In March 2015 the board announced a material change in the company’s dividend policy in recognition of the continued attraction of dividends to the majority of private shareholders. The board now pays a significantly higher, quarterly dividend which comprises 100% of available income each year, boosted by the payment of a small proportion from capital profits. In the past, they have targeted a dividend that equates to 4% of the share price at the year end date (31st Jan). In this way, the board believes that the portfolio integrity is not compromised and, whilst total return should remain the same, a larger proportion of it will be available to shareholders through the payment of an enhanced dividend. The board announced that they will be paying a dividend of 17.1p for the financial year ending 31st January 2017, a 19.6% increase on that paid in 2016. It represents a yield of 4% on the year-end share price of 432p, and a yield of 3.5% on the share price at the time of writing. As such, IPU offers a highly attractive yield relative to the wider sector, where the average yield for the open-ended sector is 1.04% (that figure is for those that actually pay a dividend; the average across every fund in the sector is 0.8%). As we show in the discount section, the discount has moved in progressively since the board made its initial announcement regarding the change in the dividend policy.
At Invesco Perpetual, each manager is responsible and accountable for his/her own performance and so, with no house view, stock selection is the sole responsibility of the two managers. Macro views they glean from colleagues are helpful but not a driver of decisions. We understand that Jonathan or Robin ALWAYS meet the managers of a company before investing.
Discount As the graph below shows, the board’s announcement in March 2015 concerning the enhanced dividend had a decisive impact on the discount. Since then the discount has rarely traded outside of single digits. It currently trades at around 4%, significantly narrower than the average for the sector of c. 14%. Invesco Perpetual UK Smaller Cos: Discount 11/04/2014 - 01/05/2017 0
-5
-10
-15
-20 Jul '14
Jan '15
Jul '15
Jan '16
Source: Morningstar
Jul '16
Jan '17 Highcharts
Charges
Invesco Perpetual UK Smaller Cos - Dividends Financial year (end Jan)
With an OC of 0.82% for the last financial year, IPU is in line with the average for the investment trust sector and considerably cheaper than the wider OEIC peer group, which has average OCFs of 0.8% and 1.19% respectively.
20
Annual dividend (pps)
the form of Robin West, who re-joined Invesco Perpetual after a period as a UK smaller companies manager at Aviva Investors. They are assisted by Luis Mesquita on the small cap desk and run around £800m in total.
%
also beaten the average fund in the wider small cap investment trust and OEIC peer group over one, three, five, ten and 15 years. Indeed, as a recent article reported on by Trustnet found, since the year 2000 IPU is in the top five investment trusts in terms of total return performance, across all sectors.
15
10
5
0 2008
2010
2012
2014
2016
Invesco Perpetual UK Smaller
Source: Morningstar, Kepler Partners LLP
Highcharts
Management Having been part of the team for more than a decade, Jonathan Brown started co-managing the trust in 2011. After the retirement of Richard Smith in 2014, he was joined by a deputy manager in
It is worth noting that 85% of the management fee and other costs are charged to capital, and, the board anticipates using capital of around 2% of NAV per year to augment the distributable income earned by the portfolio. The managers are also entitled to a performance fee of 12.5% of any outperformance of the Numis Smaller Companies Index (excluding Investment Companies), but may not exceed 1.0% of the value of the investment trust’s average funds under management in any one year. 100% of the performance fee will be charged to capital.
This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
3
www.trustintelligence.co.uk/investor
02.05.2017
Important Information Invesco Perpetual UK Smaller Companies is a client of Investment Trust Intelligence. Research produced by Investment Trust Intelligence covering Invesco Perpetual UK Smaller Companies should be considered a marketing communication, and is not independent research. This report has been approved under section 21 of the Financial Services and Markets Act 2000 by Kepler Partners LLP for communication to retail clients and private persons as defined by the Financial Services Authority. This is a marketing document, and should be considered non-independent research as defined in COBS 12.3.2R. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, subject to restrictions imposed by internal rules. This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell. Any prices or quotations contained herein are indicative only. The information in this report is believed to be correct, but its accuracy or completeness cannot be guaranteed. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Please remember that past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. Independent financial advice should be taken before entering into any financial transaction. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority. Click here to read our terms and conditions.
This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
4
www.trustintelligence.co.uk/investor
02.05.2017
Assuming these proposals are enacted, those tendering will bear an exit charge of 1.5%. Shareholders tendering in excess of 40% may be able to realise those shares to the extent that others do not tender, as well as the corporate broker trying to match shareholders wishing to sell with other investors seeking an increased investment in the company. A further range of options will be offered to shareholders around the time of the 2020 AGM. 100
The managers aim to achieve above average performance with below average volatility, and over the past five years have broadly achieved this. IPU marginally underperforms in sharp upward moves in the market, but tends to outperform when markets turn sour. Part of the reason for the strong long term performance can be attributed to the disciplined investment process followed by the current management team of Jonathan Brown (pictured) and Robin West, who at all stages throughout the cycle aim to invest in high quality companies. In 2015 the board announced steps to significantly increase the dividend by distributing 100% of available income each year through the payment of a small proportion from capital profits, and thus the shares currently yield 3.5%. This compares very favourably relative to other small company funds and trusts, but also those in the equity income sector.
50
0
-50 Jul, 2014
Jan, 2015
Jul, 2015
Jan, 2016
Invesco Perpetual UK Smaller Companies plc
Jul, 2016
Jan, 2017
UK Smaller Companies
Source: FE
Portfolio The investment universe for the managers is the FTSE 250 and smaller companies, including AIM, although they will not invest in a company with a market capitalisation of less than £100m. As the graph below shows, the trust is underweight companies above £1bn market cap relative to the index, and overweight those smaller than £500m. We understand that this places it broadly in the middle of the pack relative to peers – neither too heavily weighted to mid-caps, nor over-exposed to micro-caps. Invesco Perpetual UK Smaller Cos Market Cap Breakdown
40
30
%
The enhanced dividend payment has had a beneficial impact on the discount which has narrowed, and the shares currently trade on a discount of c 4% which is significantly narrower than the peer group. Whilst the risks to the discount are there over the medium term, the promise of a further exit opportunity in 2020 as well as the potential for buybacks between now and then may help to mitigate them.
50
20
10
0
Recent corporate update As we discuss in the discount section, the board’s actions helped successfully bring the discount in through two structural initiatives – promising one of several options to shareholders on or around the date of the annual general meeting in 2017, as well as more latterly an enhanced dividend policy. Last month, the board announced that after consultation with major shareholders, it has resolved to provide the opportunity to tender for up to 40% of the company’s total shares in issue, to be voted on at the AGM on 8 June.
>1.5bn
1-1.5bn
IPU (% invested)
500-1bn
100-500m
0-100m
Numis Index Highcharts
Source: Invesco Perpetual, Kepler Partners
In terms of shape, the portfolio typically comprises around 80-90 holdings – neither too concentrated nor too diversified and no position is allowed to get much bigger than 3% of NAV (currently only one holding is greater than 3% - JD Sports at 3.15%). The team currently monitors around 500 companies out of a possible universe of 2000. From this, the managers try to pick businesses which have robust and scalable business models, often niche
This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
1
www.trustintelligence.co.uk/investor
02.05.2017
businesses with significant growth potential, possibly a growing market share and are cash generative with an ability to re-invest. They steer clear of businesses with any form of pension issue. Ideally they want to see businesses have the potential to double in size in the next five years, and in typical Invesco Perpetual style, hold them for the long term.
which is designed to help them be more active users of gearing than in the past with the aim of introducing gearing during periods of sustained momentum. The managers are also, if they see fit, able to reduce exposure by hedging the portfolio using FTSE 250 futures. Given the illiquidity of this instrument, they expect to use this very infrequently.
The managers try to have a balance of themes within the portfolio and split companies according to what they view as “self-help” stories (Coats Group, Johnson Service Group), businesses that can roll out successful concepts or act as consolidators using their concept (CVS, JD Sports), and “structural growth” businesses (4imprint, Boohoo).
Returns
As a result of the managers’ stock selection preferences, the portfolio (on average) typically trades at a premium valuation to the wider market, which in the view of the managers is justified given the balance sheet strength and quality of underlying earnings. This is a pure stock picking fund, but it is perhaps noteworthy that relative to the index the trust is heavily underweight financials and overweight Technology and Healthcare.
IPU has generally underperformed sharply rising markets, and outperformed falling ones, and also outperformed in more moderate market conditions. The team say they aim to deliver “small cap outperformance with lower volatility” through their investment approach. The graph below, in which we break down the performance of the trust relative to the benchmark on a calendar year basis, shows that IPU has in the past followed this pattern relatively tightly. They have achieved this because of the managers’ aversion to higher risk stocks, but perhaps more importantly, the consistency with which they apply their investment process. IPU: discrete annual NAV total returns rel. benchmark
Invesco Perpetual UK Smaller Cos
80
Sector Breakdown 60.7
40
Annual NAV % (TR)
60
%
30
20
10
42.1
40
35.1
36.9
28.2 29.9
27.7 28.5
20.3
20
13.8 10.6
11.1
3.6
0 0
% portfolio
Source: Invesco Perpetual
ec hn ol og y
2009
T
s
Fi na nc ia ls
Ut ili tie
ria Co ls ns um er G oo ds H ea lth Co Ca ns re um er Se rv ic es T el ec om m s
ria ls
G
at e M
O il &
Ba si c
In du st
as
-1.9 -6.6
-9.1
-20 2010
2011
2012
2013
Invesco Perpetual UK Smaller
2014
2015
Source: Morningstar
% Index
2016
Numis SC Ex IT Highcharts
Highcharts
A third of the portfolio is invested in the highly diverse industrials sector. Around a quarter of the portfolio is invested in the consumer goods and services sectors. There is some concern regarding consumer spending in the wake of Brexit, and although the sector had a poor 2016 in general, it was a strong contributor to the portfolio last year due to stock selection ideas such as JD Sports.
The end result is that through the cycles, the team has established a decent track record. The graph below shows that over the past five years to the 9th April, for example, they have outperformed the benchmark and peers. However, the trust has Invesco Perpetual UK Smaller Cos: Performance vs indices last 5 years 150
100
%
Gearing The managers have authority to gear the trust to the lesser of 30% of net assets or £25m. However, this is a relatively conservative strategy, and it is therefore not surprising that the managers expect to use gearing only in modest amounts, and even then not often. The team have a market scoring system,
50
0
-50 2013
2014
2015
Invesco Perpetual UK Smaller (Cum Fair NAV) Morningstar IT UK SMC (Cum Fair NAV)
2016
2017
Numis SC Ex IT (Cum Fair NAV)
Source: Morningstar This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
Highcharts
2
www.trustintelligence.co.uk/investor
02.05.2017
Dividend In March 2015 the board announced a material change in the company’s dividend policy in recognition of the continued attraction of dividends to the majority of private shareholders. The board now pays a significantly higher, quarterly dividend which comprises 100% of available income each year, boosted by the payment of a small proportion from capital profits. In the past, they have targeted a dividend that equates to 4% of the share price at the year end date (31st Jan). In this way, the board believes that the portfolio integrity is not compromised and, whilst total return should remain the same, a larger proportion of it will be available to shareholders through the payment of an enhanced dividend. The board announced that they will be paying a dividend of 17.1p for the financial year ending 31st January 2017, a 19.6% increase on that paid in 2016. It represents a yield of 4% on the year-end share price of 432p, and a yield of 3.5% on the share price at the time of writing. As such, IPU offers a highly attractive yield relative to the wider sector, where the average yield for the open-ended sector is 1.04% (that figure is for those that actually pay a dividend; the average across every fund in the sector is 0.8%). As we show in the discount section, the discount has moved in progressively since the board made its initial announcement regarding the change in the dividend policy.
At Invesco Perpetual, each manager is responsible and accountable for his/her own performance and so, with no house view, stock selection is the sole responsibility of the two managers. Macro views they glean from colleagues are helpful but not a driver of decisions. We understand that Jonathan or Robin ALWAYS meet the managers of a company before investing.
Discount As the graph below shows, the board’s announcement in March 2015 concerning the enhanced dividend had a decisive impact on the discount. Since then the discount has rarely traded outside of single digits. It currently trades at around 4%, significantly narrower than the average for the sector of c. 14%. Invesco Perpetual UK Smaller Cos: Discount 11/04/2014 - 01/05/2017 0
-5
-10
-15
-20 Jul '14
Jan '15
Jul '15
Jan '16
Source: Morningstar
Jul '16
Jan '17 Highcharts
Charges
Invesco Perpetual UK Smaller Cos - Dividends Financial year (end Jan)
With an OC of 0.82% for the last financial year, IPU is in line with the average for the investment trust sector and considerably cheaper than the wider OEIC peer group, which has average OCFs of 0.8% and 1.19% respectively.
20
Annual dividend (pps)
the form of Robin West, who re-joined Invesco Perpetual after a period as a UK smaller companies manager at Aviva Investors. They are assisted by Luis Mesquita on the small cap desk and run around £800m in total.
%
also beaten the average fund in the wider small cap investment trust and OEIC peer group over one, three, five, ten and 15 years. Indeed, as a recent article reported on by Trustnet found, since the year 2000 IPU is in the top five investment trusts in terms of total return performance, across all sectors.
15
10
5
0 2008
2010
2012
2014
2016
Invesco Perpetual UK Smaller
Source: Morningstar, Kepler Partners LLP
Highcharts
Management Having been part of the team for more than a decade, Jonathan Brown started co-managing the trust in 2011. After the retirement of Richard Smith in 2014, he was joined by a deputy manager in
It is worth noting that 85% of the management fee and other costs are charged to capital, and, the board anticipates using capital of around 2% of NAV per year to augment the distributable income earned by the portfolio. The managers are also entitled to a performance fee of 12.5% of any outperformance of the Numis Smaller Companies Index (excluding Investment Companies), but may not exceed 1.0% of the value of the investment trust’s average funds under management in any one year. 100% of the performance fee will be charged to capital.
This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
3
www.trustintelligence.co.uk/investor
02.05.2017
Important Information Invesco Perpetual UK Smaller Companies is a client of Investment Trust Intelligence. Research produced by Investment Trust Intelligence covering Invesco Perpetual UK Smaller Companies should be considered a marketing communication, and is not independent research. This report has been approved under section 21 of the Financial Services and Markets Act 2000 by Kepler Partners LLP for communication to retail clients and private persons as defined by the Financial Services Authority. This is a marketing document, and should be considered non-independent research as defined in COBS 12.3.2R. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, subject to restrictions imposed by internal rules. This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell. Any prices or quotations contained herein are indicative only. The information in this report is believed to be correct, but its accuracy or completeness cannot be guaranteed. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Please remember that past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. Independent financial advice should be taken before entering into any financial transaction. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority. Click here to read our terms and conditions.
This article was commissioned by Invesco Perpetual UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
4
www.trustintelligence.co.uk/investor
02.05.2017
