Valuations Across The Board Are Still Attractive For Bottom- Up Stock Pickers At Invesco Ltd.; Read Their Outlook On Large-Cap Value Names And General Market Trends In This Exclusive Interview

Wall Street Transcript

67 WALL STREET, New York - March 22, 2012 - The Wall Street Transcript has just published its Large Cap Value and Other Investing Strategies Report offering a timely overview of dominant market trends to serious investors and industry executives. This Large Cap Value and Other Investing Strategies Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Protecting Capital During Difficult Times - Large-Cap, Deep-Value - Quality in Large-Cap Investing - Client-Oriented Culture

Companies include: National Grid (NGG); United Parcel Service (UPS); 3M (MMM); Apple (AAPL) and many more.

In the following brief excerpt from the Large Cap Value and Other Investing Strategies Report, interviewees discuss the outlook for the sector and for investors.

Kevin Holt, CFA, Senior Portfolio Manager at Invesco Ltd., joined the company in 2010. Previously, he was Portfolio Manager for the U.S. value strategy at Van Kampen Funds Inc., which he joined in 1999. Before joining Van Kampen, he served as a Senior Research Analyst at Strong Capital Management and as a Portfolio Manager/Research Analyst at Citibank Global Asset Management. He began his career as a Senior Financial Analyst for Harris Trust and Savings Bank. Mr. Holt earned a bachelor's degree from the University of Iowa and a MBA from the University of Chicago Booth School of Business. He is a Member of the CFA Institute and the Houston Society of Financial Analysts.

TWST: Right now, are there certain sectors you like better than others?

Mr. Holt: We're constructive on the financial sector, which is somewhat contrarian. It's done a little bit better year to date, but if you think about the financial sector over the last four years, it's not been the place to be for a variety of reasons. We think we've passed a lot of the balance sheet risk we've seen, and we really don't think there's reason to be very concerned about possible bankruptcies. There are two reasons we have a constructive outlook on financials. For one, financial companies have their investment portfolios in much better position than they did in 2008. Secondly, their valuations are attractive. Many of the stocks are selling below tangible book value, which is a kind of theoretical liquidation value. There's a certain margin of comfort there. On top of that, because a lot of regulation and because a lot of the bad loans that were made in early part of the decade, banks have become very conservative. As a result, they've accumulated a lot of excess capital in kind of the bank account, per se, much like you really accumulate excess capital in your bank account. We think over the next probably two to four years that these banks are going to buy back a tremendous amount of the stock outstanding because they have too much money, and there's nothing to do with it except buy back stocks and pay dividends. We find that very attractive, and we don't think the market appreciates that when you combine that with the valuation the stocks trade at.

TWST: Is there another sector right now you believe is worth mentioning?

Mr. Holt: I would say we're pretty intrigued with energy at this point. It's an area we've been building up. The relevant metrics in energy are price-to-book value and price-to-cash flow, and some energy stocks look attractive in terms of those metrics. We do believe there's a finite amount of oil in the world. So with the demand trends that we see over the next 10, 15 years, it's hard to paint a scenario where oil prices are really going to go down a whole lot from their current level of about $105 per barrel. We think the stocks are probably discounting $65, $70 oil, and the price of oil is now a lot higher than that. I think there's a much higher probability that oil stays around $90 to $100. It would really take a prolonged worldwide recession for oil to go significantly lower than that. Many of the integrateds pay nice dividend yields, so we do like some of the integrated companies that generate tremendous amounts of cash flow that goes into the valuation of the stocks. We're pretty positive on that area, too. We like the oil service names, which haven't generated as much cash historically. We like them because there's a shortage of oil in the world, and you're going to continue to see exploration activities, which play right into the wheelhouse of the oil service companies, so it's a good fundamental story going forward.

TWST: Would you give us some of the specific holdings that illustrate Invesco's investment philosophy?

Mr. Holt: Two stocks within the financials that we like that really fit all the criteria we talked about are JP Morgan (JPM) and Citigroup (C). Those two stocks are our second- and third-largest holdings in the Invesco Van Kampen Comstock Fund. We really like both of those stocks. On the energy front, we own BP (BP), which is somewhat controversial after what happened with BP's Macondo well in the Gulf of Mexico in 2010. We think the market put them in the penalty box when that happened. But we think if you're willing to look out over a couple of years, BP is still likely to settle legal liabilities for less than what the market is discounting within the stock. Any time any person or any company goes through a bit of turmoil, it gives you an opportunity to reevaluate and refocus. What's happened with BP is a good example because it's given BP an opportunity to refocus and get rid of some assets that may not have been considered key or core assets.

TWST: What is your outlook right now?

Mr. Holt: We are bottom-up stock pickers. Our attitude is that 99.9% of the time, if the economy is bad, it will eventually get good. And if the economy is good, it will eventually get bad. With that said, I think we're in a once-in-a-200-year environment as a result of what happened in 2008. The key in that is we want to make sure that the balance sheets of the companies that we own in the fund are strong enough to endure as long as five years in a given economic environment, so we can wait it out given our patient style. I think the good news, whether it's in the U.S. or Europe, is that all the problems seem to be on the table now, so we all know what the problems are. The first step to solving a problem - and they're not always easy to solve - is to acknowledge you have a problem and to get everything out on the table. The market is a discounting mechanism, so a lot of people say the last decade within the equity markets have been a lost decade. The markets were discounting what happened in 2008 ahead of time to some extent. I think the markets will probably start to act better as they start to see the light at the end of the tunnel. Given that valuations are still attractive, the market will start to act better, and I think that's kind of what's happening right now.

TWST: What's the best advice you would give to investors right now?

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