Market overview
- Market volatility continued in the third quarter as currency issues, rising interest rates and trade concerns weighed on global stocks, with developed markets generally faring better than emerging markets.
- Most Eurozone indexes finished the quarter with slight gains, though slowing economic growth and political uncertainty in Italy tempered returns.
- Emerging markets struggled, particularly China due to ongoing trade and tariff disputes with the US. A stronger US dollar and higher interest rates also dampened returns and contributed to currency depreciation in a number of markets, including Turkey, Argentina and Brazil.
Performance highlights
- Invesco European Growth Fund (Trades, Portfolio) Class A shares at net asset value (NAV) declined during the quarter, underperforming its benchmark index. (Please see the investment results table on page 2 for fund and index performance.)
- Holdings in the energy, information technology (IT) and communication services sectors outperformed those of the benchmark, adding to both absolute and relative results.
- An overweight in the strong energy sector and an underweight in the relatively weak IT sector also added to relative return.
- On a geographic basis, stock selection in Germany, Israel and Italy added to both absolute and relative returns.
- UK-based energy company John Wood Group PLC (LSE:WG., Financial) was the largest individual contributor to relative return during the quarter. The company delivered convincing results in the first half of the year, with strong cash conversion that quieted concerns about its ability to successfully integrate the large Amec Foster Wheeler acquisition. Meanwhile, a backdrop of rising oil prices helped the broader industry outlook.
Detractors from performance
- On a sector basis, stock selection and a meaningful overweight in financials was a key detractor from relative return. The fund’s bank holdings were weak, including Sberbank of Russia PJSC, Haci Omer Sabanci Holdings AS in Turkey, ING Groep NV in Germany and Intesa Sanpaolo SpA in Italy (4.09%, 1.67%, 1.00% and 0.81% of total net assets, respectively). The fund’s diversified financials, including UK-based IG Group PLC and TP ICAP PLC, were also weak.
- Stock selection and an underweight in the strong health care sector detracted from relative return. Having no exposure to select top performing index stocks within the pharmaceuticals industry dragged on relative results.
- Geographically, exposure in Switzerland, Turkey, France and Russia detracted from both absolute and relative results. Holdings in Russia and Turkey (markets not represented in the index) dragged on relative return as geopolitical and macro-economic volatility affected these markets and their currencies.
- Haci Omer Sabanci Holdings AS (IST:SAHOL, Financial) was the fund’s largest individual detractor. The Turkish holding company suffered as investor sentiment toward Turkey remained negative amid accelerating consumer inflation, currency weakness and another interest rate hike. Despite this backdrop, we believe Sabanci has highly attractive strategic assets, is conservatively managed, has a strong balance sheet and trades at a deep discount.
Positioning and outlook
- We took advantage of market volatility during the quarter to put some cash to work at more attractive valuation levels. We added three new holdings: UK-based global oilfield services and equipment company TechnipFMC PLC, Italy-based FinecoBank SpA and Hungary-based pharmaceutical company Richter Gedeon NYRT (0.94%, 0.66% and 1.01% of total net assets, respectively). Deteriorating fundamentals and/or valuations led to the sale of Lloyds Banking Group PLC and TP ICAP (both 0.00% of total net assets).
- Increased volatility should be a continuing global theme for 2018, which could create opportunities for long-term investors like us. Regardless of the macroeconomic environment, we remain focused on applying our well-established, long-term, bottom-up Earnings, Quality, Valuation (EQV) investment process that seeks to identify attractively valued, high-quality growth companies.
Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher. Visit invesco.com/performance for the most recent month-end performance. Performance figures reflect reinvested distributions and changes in net asset value (NAV). Investment return and principal value will vary, and you may have a gain or a loss when you sell shares. No contingent deferred sales charge (CDSC) will be imposed on redemptions of Class C shares following one year from the date shares were purchased. Performance shown at NAV does not include applicable CDSC or front-end sales charges, which would have reduced the performance. The Investor Class shares have no sales charge; therefore, performance is at NAV. Class Y shares have no sales charge; therefore, performance is at NAV. Performance shown prior to the inception date of Class Y shares is that of Class A shares and includes the 12b-1 fees applicable to Class A shares. Returns less than one year are cumulative; all others are annualized. Fund performance reflects any applicable fee waivers and/or expense reimbursements. Had the adviser not waived fees and/or reimbursed expenses currently or in the past, returns would have been lower. See current prospectus for more information. Index returns do not reflect any fees, expenses, or sales charges.
