Market overview
- Global equity markets began the year with a broad rally that resulted in the best first quarter for stocks since 2013. Market trends shifted during the quarter as the US dollar weakened, volatility was largely absent and emerging market equities posted double-digit gains.
- These shifts were a reversal from the immediate post-election period as investors became increasingly willing to take on more risk in the first quarter.
- Investors continued to react to headlines out of Washington, while stronger economic data during the quarter supported optimism.
Performance highlights
- Invesco European Growth Fund (Trades, Portfolio) Class A shares at net asset value (NAV) delivered a positive return during the quarter, but underperformed its benchmark index. (Please see the investment results table on page 2 for fund and index performance.)
Contributors to performance
- Fund holdings in the real estate and consumer staples sectors outperformed those of the benchmark and were among the strongest contributors to relative results. Stock selection and an underweight in the weaker materials sector supported both absolute and relative results as well.
- Geographically, stock selection in Germany and Sweden added to both absolute and relative returns.
- DCC PLC (LSE:DCC, Financial) was the most significant individual contributor to fund performance during the quarter. The oil-fuel distributor reported operating results in line with consensus expectations, but more importantly, announced a material acquisition of Exxon Mobil Corp.’s (not a fund holding) retail petrol network in Norway. Though DCC is no longer priced at what we consider a bargain-basement valuation, the company has a talented, long-tenured management team and an exemplary capital allocation record that suggests significant potential for additional energy-distribution acquisitions.
Detractors from performance
- Fund holdings in the consumer discretionary and financials sectors underperformed those of the benchmark and were among the largest detractors from relative results.
- The fund’s cash position, which averaged in the mid-to-high single digits during the quarter, detracted from relative performance given the strongly rising market. It is important to note that cash is a by-product of the team’s bottom-up investment process and not the result of any “top-down” tactical asset allocation or risk-management allocation decision.
- Geographically, fund holdings in the US, Russia and Spain detracted from relative return.
- John Wood Group PLC (LSE:WG., Financial) was the most significant individual detractor during the quarter. Shares of the multinational energy services company performed very well in 2016. The company’s stock price then sold off during the first quarter of 2017 due to cautious guidance. We have confidence in John Wood’s operational strength based on its outstanding results over the past couple of challenging years, but we agree with the company’s management that there is no reason for bullish forecasts at this early juncture.
Positioning and outlook
- Additions to the portfolio included Italy-based banking group Intesa Sanpaolo SpA and UK-based hospitality, food service and convenience store company Conviviality PLC (0.71% and 0.90% of total net assets, respectively).
- Holdings sold during the quarter included Germany-based private equity company AURELIUS Equity Opportunities SE, Sweden-based high-technology and global engineering company Sandvik AB and global specialty insurance and reinsurance company Lancashire Holdings Ltd. (all 0.00% of total net assets).
- Despite global equities positive start to the year, a number of risks still persist. These include ongoing uncertainties related to “Brexit” and the Eurozone, upcoming elections in France and Germany, deleveraging in the largest emerging-market economies, and the longer term implications of the new Trump administration and a stronger US dollar.
- Regardless of the macroeconomic environment, we remain focused on applying a well-established, long-term, bottom-up EQV investment process that seeks to identify attractively valued, high-quality growth companies.
The opinions expressed are those of the fund’s portfolio management, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Holdings are subject to change and are not buy/sell recommendations.
