Invesco European Growth Fund commentary for the third quarter 2014.
Invesco European Growth Fund: Performance summary
Market Overview
- Equity markets faced a wide range of geopolitical issues and headwinds during the third quarter and finished lower, largely due to a difficult September.
- European growth stalled through the summer, with the exception of the UK, where recovery remained vigorous.
Performance Highlights
Invesco European Growth Fund Class A shares at net asset value (NAV) returned -8.08%, underperforming its benchmark, the MSCI Europe Growth Index, which returned – 7.00%. (Please see the investment results table on page 2 for fund and index performance.) Portfolio exposure in financials and energy were key drivers of both relative and absolute results.
Invesco European Growth Fund: Top contributors and detractors
In the choppy market environment, the fund’s cash exposure added to relative results. It is important to note that we do not use cash for “top-down” tactical asset allocation purposes. Historically, when the portfolio’s cash position has been higher than average, it has reflected a lack of good earnings, quality and valuation (or “EQV”) investment opportunities in the market place.
Shire PLC and Micro Focus International PLC were the fund’s largest contributors over the quarter.
Shire PLC (LON:SHP) (NASDAQ:SHPG), an Ireland-based biopharmaceutical company, saw its stock price rise as the company received a takeover bid from a US drug maker. Micro Focus International plc (LON:MCRO)), a UK-based software and information technology company, announced a value-adding acquisition of a US-based software company.
Fund holdings in financials and an overweight in energy were key detractors from relative and absolute results. Stock selection in the consumer staples sector was a drag as well.
Prosafe SE and Sberbank of Russia were the largest individual detractors.
Prosafe (STO:PRSO), a global leader in offshore accommodation rigs, has been under pressure due to broad-based weakness in oilfield services and concerns about new supply entering the market. Sberbank Rossii OAO (MCX:SBERP) (OTCMKTS:SBRCY), a leading Russian bank, has been vulnerable to negative sentiment toward Russia. We believe the bank’s fundamentals remain strong and valuation appears very cheap despite current economic weakness.
Invesco European Growth Fund: Positioning and outlook
German broadcaster ProSiebenSat.1 Media AG (ETR:PSM) (OTCMKTS:PBSFF) was added to the fund during the quarter (0.79% of total net assets). We sold out of UK-based outsourcing company Bunzl plc (LON:BNZL) (OTCMKTS:BZLFY), Italy-based oil and gas contractor Saipem SpA (BIT:SPM) (OTCMKTS:SAPMY) and Germany-based chemical distribution company Brenntag AG (ETR:BNR) (OTCMKTS:BNTGF) (all 0.00% of total net assets). Sector allocations, which are driven by bottom-up stock selection, were relatively unchanged during the quarter.
Within Europe, the combination of economic weakness, high unemployment, low inflation and geopolitical risks may continue to dampen investor confidence despite the European Central Bank’s more aggressive policies aimed at boosting lending and raising the region’s flagging economic growth rates.
Cyclical economic recovery outside the US remains relatively uncertain and inconsistent, leading to a sharp rise in the US dollar that may dampen investors’ near-term appetite for international markets, particularly emerging markets with higher current-account deficits.
Opinions expressed are those of the fund’s portfolio management. Holdings are subject to change and are not buy/sell recommendations.
