Market overview
- Weakening global economic data and ongoing US-China trade conflict contributed to higher market volatility in the third quarter.
- Global recession concerns caused a sharp equity selloff in August as investors crowded into asset classes perceived to be safe havens, including US Treasuries and gold.
- In September, both the Federal Reserve and European Central Bank cut interest rates, providing a measure of support for risk assets. Growing optimism about a potential trade deal also boosted equities in September.
- However, except for the US and Japan, most regions declined during the quarter.
Positioning and outlook
- We initiated two new positions during the quarter, Ireland-based health care company ICON and Netherlands-based energy company SBM Offshore (0.78% and 0.75% of total net assets, respectively). We exited positions in Germany-based industrials company GEA Group and UK-based information technology company Micro Focus International (both 0.00% of total net assets).
- We hope that investor sentiment will eventually rotate back in favor of European equities as their valuation levels are now close to five-year lows and at a major discount to US equities.
- Regardless of the macroeconomic environment, we remain focused on applying our well-established, long-term, bottom-up Earnings, Quality, Valuation (EQV) investment process that seeks to identify attractively valued, high-quality growth companies.
Performance highlights
- Invesco European Growth Fund (Trades, Portfolio) Class A shares at net asset value (NAV) declined during the quarter but outperformed its benchmark index. (Please see the investment results table on page 2 for fund and index performance.)
Contributors to performance
- Relative outperformance was primarily driven by stock selection and an underweight in the consumer discretionary sector. Within the sector, Ireland-based bookmaking company Flutter Entertainment (formerly Paddy Power Betfair) was a notable contributor (1.14% of total net assets).
- The fund’s holdings in the industrials sector outperformed those of the benchmark index and added to relative return. Germany-based MTU Aero Engines was among the largest contributors during the quarter.
- Geographically, stock selection in Germany was the largest contributor to relative performance. Exposure to Turkey, which is not represented in the benchmark index, added to both absolute and relative results as well.
- Ultra Electronics was the fund’s leading individual contributor for the quarter. The UK-based defense contractor benefited from solid revenue growth driven by strong US defense spending. The company also made progress on a number of strategic initiatives and won contracts for a number of key new programs, which could have significant long-term growth potential.
Detractors from performance
- The fund’s holdings in the consumer staples sector outperformed those of the benchmark index, but an underweight in the positive-performing sector detracted from relative return.
- Stock selection in the information technology sector also detracted from relative performance. UK-based Micro Focus International was a key detractor within the sector. We had been steadily trimming the fund’s position since 2017 and sold the remaining small position after a profit warning in August.
- Geographically, stock selection in Switzerland and the Netherlands hampered relative return. Underweights in both countries were a further drag on relative results.
- German software products maker SAP was the largest individual detractor for the quarter, as investors were concerned about disappointing second quarter results. Despite the weak results, management indicated that the pipeline for deals remains strong. We added to the fund’s position on share price weakness because we believe this is a very high-quality business with high recurring revenues that could benefit from an improved product cycle plus structural growth in cloud storage and computing.
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.
