- Global equity markets rebounded in September to finish the third quarter strong, providing investors a double-digit gain for the three-month period. Equity investors remained optimistic despite Middle East violence, a possible US government shutdown and concerns about central bank "tapering" of asset purchases.
- UK equities rebounded meaningfully. Robust gains occurred across many sectors, spurred by improving housing and employment dat a. Continental Europe posted strong gains for the quarter as well. Economic data suggest that the long European recession is past, and growth, though still in the early stages, is modestly improving.
- Invesco European Growth Fund Class A shares at net asset value (NAV) delivered a double-digit return for the quarter, but unde rperformed its benchmark, the MSCI European Growth Index. (Please see the investment results table on page 2 for fund and index performance.)
- A higher-than-average cash position combined with portfolio exposures in the financials, energy and materials sectors drove relative underperformance.
All sectors posted positive absolute returns for the quarter. The fund's holdings in the health care and consumer staples sectors outperformed those of the bench- mark and were among the strongest contributors to performance.
- Top country level contributors included Switzerland, Germany, France and the UK.
- MorphoSys AG , Intrum Justitia AB and Aryzta AG were among the most significant individual contributors to fund performance during the quarter (1.95%, 1.68% and 2.64% of total net assets, respectively).
- MorphoSys (MOR) is a German biotechnology company with a proprietary technology to develop human antibodies for specific diseases. The company signed two licensing deals (with GlaxoSmithKline PLC and Celgene Corp.) for its proprietary compounds, providing outside validation for its technology as well as upfront cash and future royalty payments.
- Sweden-based Intrum Justitia (IJ), Europe's largest credit management services company, continued to demonstrate steady and attractive margins in its core business through a time of macroeconomic challenge.
- Aryzta (ARYN), a Switzerland-based global food company, continued to execute well, enjoying robust revenue growth and margin expansion
The fund's holdings in the financials, energy and materials sectors underperformed those of the benchmark and were the most significant detractors from relative performance.
- The fund's cash position, which remained in the low double-digit range during the quarter, also detracted from relative performance as equity markets rallied.
- Haci Omer Sabanci Holding A.S., Tupras-Turkiye Petrol Rafinerileri A.S. and Israel Chemicals Ltd. were among the most significant individual detractors from fund performance during the quarter (1.51%, 0.70% and 0.84% of total net assets, respectively).
- Haci Omer Sabanci (SAHOL) is a conservative Turkish holding company, of which Akbank T.A.S. is the largest holding. There was nothing company-specific behind the stock's weakness. Rather, the weakness stemmed from negative investor sentiment toward Turkey and emerging markets in general.
- Tupras-Turkiye (TUPRS) is Turkey's largest petrochemical company. Much like Haci Omer Sabanci , there was nothing company-specific behind the stock weakness, which also stemmed from negative sentiment toward Turkey and emerging markets in general.
- Israel Chemicals (ISCHF) is a company that extracts minerals from the Dead Sea to make fertilizers and potash. The company's share price declined over the quarter along with other potash miners as OAO Uralkali (not a fund holding), the world's biggest potash producer, suddenly abandoned its output limits, which put downward pres- sure on prices
Positioning and outlook
- We added four new holdings to the fund, while selling five holdings during the quarter.
- Additions to the portfolio included UK-based global investment management group Aberdeen Asset Management PLC, German telecommunications company Deutsche Telekom AG and Italian oil services company Saipem S.p.A (1.19%, 1.01% and 0.91% of total net assets, respectively) .
- The team trimmed or sold several fund holdings with EQV (earnings, quality, valuation) characteristics that were no longer as compelling as when we first initiated the positions. These included British oil and gas producer BG Group PLC , Swedish commercial vehicle manufacturer Volvo AB, German dialysis services company Fresenius Medical Care AG & Co., and Russian natural gas company Gazprom OAO (all 0.00% of total net assets, respectively).
- European balance sheets remain overleveraged (as evidenced by ratios of household and financial debt-to-GDP). Therefore, we expect very low growth from this region while balance sheets are being repaired. On the positive side, negative earnings revisions appear to be easing and valuations remain attractive.
- As always, regardless of the macroeconomic environment, the team remains focused on our bottom-up investment approach of identifying attractive companies that fit our EQV investment process. We continue to look for high-quality growth companies that exhibit the following characteristics: stron g organic revenue growth, pricing power, strong balance sheets, cash generation and reasonable valuations. In addition, we continue to favor companies that are able to consistently generate cash during weak eco- nomic environments, which allows them to increase dividends and/or buy back shares.
Opinions expressed are those of the fund's portfolio management. Holdings are subject to change and are not buy/sell recommendations.