Invesco European Growth Fund 2nd Quarter Performance Commentary
Market overview
After a relatively calm start to 2019, global equity markets faced greater volatility in the second quarter, hampered by lingering US/China trade issues, potential for new tariffs and slowing global growth.
Global equity markets, particularly China, declined sharply in May, ending a four-month rally. Trade and tariff issues, which were not limited to the US and China, clouded the outlook for many global economies. Disagreement within the UK about its withdrawal from the European Union increased uncertainty for the UK and Eurozone economies.
Following better performance in June, most global equity markets managed modest positive returns for the second quarter, with developed markets generally outperforming emerging markets. China was an exception, declining during the second quarter.
Performance highlights
- Invesco European Growth Fund (Trades, Portfolio) Class A shares at net asset value (NAV) posted 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
- Stock selection and an underweight in the health care sector was the largest contributor to relative performance. German biotechnology company MorphoSys was a notable contributor within the sector (2.56% of total net assets).
- A meaningful overweight in financials, one of the quarter's strongest sectors, added to relative return.
- Geographically, exposure to Russia, which is not represented in the benchmark index, added to relative return. Stock selection and an underweight in Denmark added to relative results as well.
Sberbank of Russia (MIC:SBERP) was the fund's leading individual contributor for the quarter. The company continues to deliver industry-leading returns despite a lackluster Russian economy. Investor perceptions have also improved, partly because Russia's economy has shown it can function reasonably under sanctions and partly because there are many new concerns, including trade wars to which other economies are far more exposed and Middle East flare-ups.
Detractors from performance
- Stock selection in the consumer staples sector was a key detractor from relative return. The portfolio's food, beverage & tobacco industry holdings were weak. Having no exposure to strong index performers, including Nestle in Switzerland and Danone in France (both 0.00% 3.14 of total net assets), hampered relative return as well.
- Portfolio's holdings in the industrials sector underperformed those of the benchmark index, detracting from relative results.
- Geographically, stock selection in France and Italy hampered relative return.
- The fund's cash position in a rising market detracted from relative results. As a reminder, cash is a by-product of our bottom-up stock selection process.
- UK-based British American Tobacco (NYSE:BTI) was the largest individual detractor for the quarter. After price gains in the first quarter of 2019, valuation multiples in the tobacco sector compressed during the second quarter due to US growth concerns. We are keenly monitoring the US regulatory situation and believe earnings risk is adequately reflected in the company's valuation.
Positioning and outlook
- We initiated one new position during the quarter, Switzerland-based vision care and device company Alcon (0.84% of total net assets). We exited Israel Discount Bank as its management team has executed well and its valuation has risen (0.00% of total net assets). We hope investor sentiment will eventually rotate back in favor of European equities as their valuation levels are close to five-year lows and they now trade at a major discount to US equities.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
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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.
All data provided by Invesco unless otherwise noted.
This article first appeared on GuruFocus.
