Invesco International Growth's style can sometimes work against it, but its consistent approach -- focusing on the earnings growth of high-quality businesses trading at reasonable valuations -- has delivered attractive returns over the long term. Add to the mix a stable and experienced management team and the fund has the necessary pieces to outperform, according to research performed by Morningstar Investment Management LLC.
The Invesco growth team uses the catchphrase EQV -- for earnings, quality and valuation -- to describe its investment process. At its core is a search for sustainable earnings growth, that doesn't rely too much on leverage (debt), at a price that is within an acceptable range. Although the managers use quantitative screens to eliminate stocks that don't meet their standards, the selection process relies heavily on fundamental analysis of companies and managements.
The fund's managers and analysts are divided into two teams -- one covering Asia and Latin America and one for Europe and Canada -- and are further divided between large and small caps. The managers and analysts are very experienced; lead manager Clas Olsson has been on the team since 1994 and running it since 1999. All seven of the portfolio managers listed on this fund have greater than US$1 million invested in Invesco U.S.-domiciled funds, demonstrating an impressive level of alignment with investors.
The fund's benchmark is the MSCI EAFE Index, but the fund can stray far from the index weightings. For example, it typically includes a 15% to 20% weight in emerging markets, which are not part of the benchmark. True to its style, the portfolio always lands in or very near the large-growth portion of the Morningstar Style Box. The portfolio is well-diversified and typically holds 70 to 100 issues, with the top 10 positions usually comprising just 20% to 25% of assets.
The cash level is typically in the low- to mid-single digits, but rises when the managers can't find enough stocks to buy. In fact, the fund held 12% to 15% of assets in cash during the 2008-09 market downturn and often has had 8% or more from 2012 onward. Indeed, reflecting management's cautious view on valuations and opportunities in the market, the fund's cash level stood at 9.4% of assets at the end of September 2017. This isn't to say that the team hasn't been finding opportunities. They purchased bank stocks Intesa Sanpaolo and ING Groep so far this year, but they've been selling other names like media stock Publicis Groupe, leaving the cash stake mostly unchanged. On balance, though, they hold on to what they own. The turnover rate is just 20% to 30% per year -- about half the category average -- which keeps trading costs down.
The portfolio maintains metrics consistent with management's focus on earnings, quality and valuation. The fund's holdings have earnings, sales and cash flow growth higher than the MSCI EAFE Index and category average. Also, the fund's average return on equity -- a popular indicator of quality -- is higher than both. At the same time, management has stayed disciplined, keeping valuation levels (as measured by the price-to-earnings ratio) within eyeshot of the benchmark.
From the start of the year through October 2017, the fund has returned 18.9% and outperformed the MSCI EAFE Index by 1.8 percentage points. An overweight to information technology and its picks in the financial services and consumer staples sectors drove the outperformance. After initially lagging in the post-U.S. election stock market rally in November 2016, the fund still has some ground to make up. It trails the index over the past year by one percentage point. However, over the long term, the fund has proved its worth. Since the launch of the fund's Class F in November 2000 through October 2017, it has beaten the index by two percentage points on an annualized basis. In more than six years that Olsson has been sole lead manager, the fund has beaten the index by half a percentage point. The fund's relative resilience in falling markets has been its key to outperformance, as demonstrated by a since-inception downside capture of 82%.
The fund's beta, or sensitivity to the market, has historically ranged between 0.8 and 0.9. Going forward, our expectations are similar. Over time, a quality bent means the fund should continue to perform better than the benchmark in falling markets (although its emerging markets stake could lead to periods of sharper drawdown) but it may struggle to keep up in rapidly rising markets or in markets not rewarding quality growth.
The fund's management-expense ratio ranks well above median in the International Equity category in the commission-based, fee-based and do-it-yourself channels. The high price tag, in a competitively priced category, is not favourable and something to keep in mind.
Overall, this is a well-rounded fund with a cautious approach to growth. It is useful as an investor's stand-alone or core international equity exposure.
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