Following positive feedback from readers of Unconventional Wisdom, in all Monthly issues going forward we will be providing a review and outlook on each of the managed funds that form part of Wattle’s Model Portfolio.
Hopefully this gives readers an opportunity to understand what each fund is invested into, why we continue to believe it is an appropriate investment and how it has performed. The first such fund is the Invesco Global Targeted Returns Fund which forms part of the Targeted Return Bucket of portfolios.
What’s the fund?
The fund in question is the Invesco Global Targeted Returns Fund, which is quite a mouthful and likely somewhat confusing for less experienced investors. The fund is best described as a ‘liquid alternatives’ strategy, which means it provides you with an exposure to alternative sources of return outside of investing directly into shares or bonds. The fund is issued by Invesco, who are a global investment manager with over $120bn in funds under management and employs over 6,000 employees. The fund itself has over $1.8bn invested in Australia and $35bn globally primarily from institutional investors and pension funds.
The Global Targeted Returns Fund seeks to provide a consistent return of 4.00% over the interest rate available on cash over every three year period. It aims to achieve this by investing your capital across every asset class available in the world including sharemarkets, bond markets, exchange traded funds, futures contracts, currencies, fixed income securities and interest rate swaps. Most investors will know each of these asset classes on their own, however, generally most managers focus on a single asset class, rather than investing across the entire spectrum. In this way, the Invesco fund is similar to a traditional AMP or union super ‘balanced’ fund that invests across asset classes based on their relative valuation.
The Invesco fund differentiates itself, however, through two key features. Firstly, they focus on minimising the potential for losses on your investments, not just on the potential returns; and secondly, they invest your capital based on the identification of 20-30 different investment ‘ideas’.
In terms of the first differentiating feature of the fund, the managers must ensure that the portfolio of assets experiences volatility, or the daily movement in prices, of less than half the level of sharemarkets. Sharemarkets are known to be the most volatile asset class with examples like the GFC when most indices fell over 40%, hence the Invesco fund is seeking to deliver what are called ‘risk-adjusted returns’. This is vastly opposed to the likes of Australia’s union super funds, which have delivered strong returns by taking substantially more risk than their names suggest. It is Wattle Partner’s view that risk-adjusted returns are more important to the superannuation and pension investors we work with than benchmark returns, as it means they have been achieved without putting your capital at substantial risk.
The first and second differentiating features are inter-related, in that the ‘idea’ driven approach to building the portfolio, results in a lower amount of volatility being experienced. This is due to the fact that the managers are not required to maintain an exposure to any asset class at any time and are free to pursue any macroeconomic driven, long-term ideas within the portfolio. The additional layer of diversification and risk reduction comes from Invesco’s in-house analysis of how each investment idea is related and how they would react if different events were to occur. They aim to ensure the level of interrelations is limited, thereby reducing the overall risk of your investment.
Where does it fit in your portfolio?
The Global Targeted Returns Fund meets the requirements of the Targeted Return Bucket not because of its name, but due to its mandate to seek a return equal to the Targeted Return Bucket’s objective of CPI + 4.00% and to achieve this by investing into a diversified portfolio of non-correlated assets. The Invesco team, who worked together at Standard Life before commencing the same strategy at Invesco, have shown an ability to deliver returns in all market environments, both positive and negative. Importantly, their approach has been successful in smoothing the returns of portfolios during volatility events, like the GFC, and ensured that investors did not suffer capital losses like those experience in equity markets.
Whilst the short-term performance of the fund has been below its stated objective, the fund has continued to attract additional investment from union super funds and institutions. This is due to the fact that these institutions believe that sharemarket returns will be difficult to achieve in the years to come without substantial downside risk. Further, they believe that by utilizing a lower risk strategy like Invesco, they can ensure the solid returns deliver in recent years aren’t lost if markets fall heavily, as the Invesco fund will not fall as far.
What does it invest into and what are the major holdings?
As discussed above, the Invesco Fund invests into between 20 and 30 long-term, macroeconomic driven ideas that are implemented across a combination of equity, bond and derivative instruments. An example of five different investment ideas currently within the portfolio are as follows:
- Currency – Indian Rupee vs. Chinese Renminbi: Invesco’s research and analysts believe that the Indian economy, and currency, have a stronger medium term outlook than the Chinese. This is due to the combination of continued reforms being implemented throughout India and slowing Chinese economy due to the US-China trade war and associated tariffs.
- Equity – UK: The fund has already benefitted from an investment into UK listed equities with substantial offshore earnings that were sold off as part of the Brexit adjustments. They have since expanded the position to include investments in a broad range of domestic focused businesses that have been oversold in light of the weaker than expected Brexit negotiations.
- Equity – US Large Cap vs. Small Cap Companies: After benefitting from the reverse position in 2018, as smaller companies drove market performance, management have changed their position and now believe that smaller companies which inflated valuations and generally higher debt, particularly in the energy sector, are now most exposed to recent interest rate hikes. They prefer companies with limited debt and strong balances sheets following the debt fueled buy backs that occurred in recent years.
- Interest Rates – Leveraged Australia: The fund recently increased its position against further rate hikes in Australia, with expectations that Australian rates will remain on hold or fall, due to the highly leveraged consumer, weaker property sector and very limited inflation. The idea stands to benefit from both an RBA Rate cut as well falling rate expectations reflected in the bond market.
How has it performed?
Unfortunately, the fund has performed poorly over the last 12 months, as the individual investment ideas have not performed as expected. That being said, the managers have delivered on the volatility target of 50% of sharemarkets, but not on the CPI + 4.00% objective return. The fund has delivered a return of just 2.00% per annum over the last three years, barely better than the cash rate over the same period. This has been disappointing and due primarily to the ‘success’ or ‘hit’ rate of their investment ideas falling to the lowest point they have been in a decade. Fortunately, the strategy has shown an ability to recover from these weak points in the past and they do not fall outside the history of the funds experiences in different markets.
In recent months the fund has begun turning the corner, increasing 2.64% in the March Quarter, which is well ahead of their objective. Most importantly, the fund showed investors why it is so valuable in ASX-listed share dominated portfolios, delivering a positive return of 0.86% in December as most sharemarkets fell by over 8% during the same period. This shows the key reason behind the inclusion of the fund, in that it does not fall when sharemarkets fall, thus providing investors with the opportunity to deploy their investment into discounted markets at the appropriate time.
What income does it provide?
As noted previously, the performance of managed funds is consistently. A managed fund is structured as a unit trust, which is similar to a typical family trust, in that all profit that is generated, including realised capital gains and dividends must be distributed to unit holders at the end of each financial year. If there is no profit, due to either investments being sold at a loss or no investments being sold at all, then the fund may not make a distribution to unit holders for any given period.
Throughout each financial year the unit price of the fund will increase and decrease in line with the value of the underlying portfolio, priced on a daily basis. Investors are able to redeem their investment for this price at any time with funds payable in just a few days. This is the key difference between a managed fund and an Exchange Traded Fund or Listed Investment Company, investors in managed funds can always redeem at the true value of the fund, rather than rely hope they are getting fair value when selling on market.
Given the weaker than expected performance, the Invesco Fund has not delivered substantial distributions in recent years, but generally pays out capital and income every six months in December and June. The distributions from this fund since its inception are as follows:
- 30 June 2016 – 1.1005 cents per unit on a unit price of $1.0313 (1.0%)
- 30 June 2017 – 4.6546 cents per unit on a unit price of $1.0451 (4.5%)
- 30 June 2018 – 1.0456 cents per unit on a unit price of $1.0198 (1.0%)
For those interesting in learning more about the investments within the fund, we suggest navigating to the following links for the portfolio and recent update.