Key takeaways
1. The fund underperformed its benchmark
Class A shares underperformed the MSCI Europe Index. Stock selection in financials, consumer discretionary and information technology (IT), as well as underweights in financials and IT, detracted from relative performance for the quarter.
2. Bottom-up stock selection focused on EQV (Earnings, Quality, Valuation) characteristics
During the quarter, we initiated three new positions and exited one stock based on our EQV fundamentals. Our actively managed, bottom-up stock selection drives the fund's sector and country allocations.
3. We remain focused on a long-term investment horizon
Regardless of the macroeconomic environment, we remain focused on applying our well-established, long-term, bottom-up EQV investment process that seeks to identify attractively valued, high quality growth companies.
Manager perspective and outlook
- Global equity returns were mostly positive for the first quarter, with developed equities outperforming emerging market equities. While UK and European equities had positive returns, they lagged Japanese and US equities, which were among the best-performing developed markets. US equities were led by mega-cap growth stocks. UK equities were weaker due to the slowing UK economy and the UK market's value bias as growth stocks were more in favor. Regarding monetary policy, the Swiss National Bank was the first developed central bank to start cutting interest rates as inflation forecasts were revised downward. The Bank of England and European Central Bank held rates steady.
- Though global markets have moved higher on improving investor confidence, we believe it is important to acknowledge that monetary policy remains uncertain and there is no guarantee of a soft economic landing. Potential risks in 2024 include ongoing geopolitical tensions and elections around the globe. Following robust global equity returns, these potential risks may create market headwinds and may increase volatility as investors look for confirmation of a positive market transition. Consequently, we believe equity investors may focus on the type of high quality and traditional investment fundamentals that are central to the fund's balanced EQV investment philosophy.
Portfolio positioning
During the quarter, we initiated positions in the following stocks:
Coloplast (OCSE:COLOB) is a Danish developer of ostomy, continence, laryngectomy and interventional urologyproducts and services. We believe Coloplast's organic growth may reaccelerate after a few challenging years, supported by several new product launches and the recent acquisition of Kerecis (specialized wound care company). We took advantage of a decline in the stock's price to initiate a position.
Rentokil Initial (RTO, Financial) is a British pest control company. The pest control industry has defensive andrecurring revenues, and cash returns historically tend to be reasonable and stable. Large operators also tend to have scale advantages over small operators. We initiated a position in Rentokil due to what we saw as its attractive valuation as the market appears in our view overly focused on near-term potential risks related to the company's recent acquisition of Terminix.
London Stock Exchange Group (LSE:LSEG, Financial) is a British financial markets information services andmarket infrastructure company that owns London Stock Exchange, FTSE Russell, Refinitiv and majority stakes in Tradeweb and London Clearing House (LCH). We believe LSEG has had a much-improved business model since the Refinitiv acquisition as a larger contribution from higher quality data and analytics solutions drives recurring revenue.
We added to several of the fund's existing positions, including Dutch/British energy company Shell (SHEL, Financial) due to what we saw as its attractive valuation, and French semiconductor chipmaker STMicroelectronics (STM, Financial), which we bought in the fourth quarter 2023.
We sold the following stock:
Amadeus IT (XMAD:AMS, Financial) is a Spanish travel technology company. Deteriorating earnings and quality led usto exit the position to make way for better EQV opportunities.
We trimmed fund positions in several other stocks, including Dutch brewing company Heineken (XAMS:HEIO, Financial) and British consumer goods company Reckitt Benckiser (LSE:RKT, Financial). We trimmed Heineken because the company's earnings outlook has been pressured by weak consumer spending combined with macroeconomic pressures in key markets such as Vietnam. We trimmed Reckitt due to deterioration in earnings and quality.
Performance highlights
Fund holdings in materials and health care outperformed those of the benchmark index, adding to relative return. Having no exposure in utilities added to relative results. Stock selection in communication services also contributed to relative return. Geographically, fund holdings in the US (categorized by country of risk), stock selection in Sweden and Denmark, and an underweight in Switzerland all contributed to relative return.
Conversely, stock selection and an underweight in financials detracted from relative results. Fund holdings in consumer discretionary underperformed those of the benchmark index, detracting from relative return. An underweight and stock selection in IT also detracted from relative performance. Geographically, stock selection in Germany, Italy and Spain detracted from relative return, as did underweights in Germany and Spain.
Contributors to performance
Below are the largest contributors to absolute return for the quarter:
Novo Nordisk (NVO, Financial) is a Danish pharmaceuticalsbusiness exposed to strong structural growth trends tied to rising incidence of diabetes and obesity. Novo has benefited from strong demand for its differentiated GLP-1 products for diabetes and more recently from accelerating demand for Wegovy, its GLP-1 drug to treat obesity.
ASML (ASML, Financial) is a Dutch global leader in thesemiconductor lithography industry. ASML has benefited from strong recovery in order bookings, driven by both logic and memory. The memory segment has benefited from greater demand for high bandwidth memory (HBM) to support substantial investment in artificial intelligence/machine learning technologies.
CRH (CRH, Financial) is a leading producer of constructionmaterials, including aggregates and cement. CRH has benefited from increased public sector demand (infrastructure projects) and non-residential demand (led by onshoring and technology/data center investments), particularly in the US. Trends in Europe have also been supportive, and pricing trends for cement have continued to improve. After the company's stock was listed in the US, the valuation discount compared to its peers has narrowed, which has helped stock performance.
Detractors from performance
Below are notable detractors from absolute return for the quarter:
Nestle's (XSWX:NESN, Financial) organic growth decelerated asinflation strained consumer budgets.
Roche's (XSWX:ROG, Financial) organic growth outlook was weakrelative to expectations due to slower sales growth across key oncology drugs and currency pressure from a strong Swiss Franc.
Reckitt Benckiser experienced headwindsdue to general consumer pressure, an accounting issue in one of the countries where it operates, and an adverse ruling in an infant formula lawsuit. As mentioned previously, we trimmed the fund's position during the quarter.
Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher. Visit invesco.com 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 so that you may have a gain or a loss when you sell shares. Returns less than one year are cumulative; all others are annualized. Performance shown prior to the inception date of Class R6 shares is that of Class A shares and includes the 12b-1 fees applicable to Class A shares. Index source: RIMES Technologies Corp. Had fees not been waived and/or expenses reimbursed in the past, returns would have been lower. Performance shown at NAV does not include the applicable front-end sales charge, which would have reduced the performance.
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.
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.
