Key takeaways
1. The fund underperformed its benchmark
Class A shares underperformed the MSCI Europe Index. Stock selection in financials, consumer staples and energy were the largest detractors 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 three stocks 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
- The first half rally in global equities came to an end in the third quarter as global equities declined. Concerns about a slowing global economy and interest rates staying “higher for longer” hampered stock returns. During the quarter, value stocks outperformed growth stocks. Energy was the best performing sector, ending the quarter in positive territory, boosted by rising oil prices as Russia and OPEC (Organization of Petroleum Exporting Countries) cut supplies. Developed global equities underperformed emerging market equities. The UK was among the best performing developed markets and had a positive return in local currency terms but was negative in US dollar terms.
- Global central banks continued to raise interest rates during the third quarter and indicated interest rates may remain higher for longer. This “higher for longer” messaging contrasts with growing evidence that most developed economies have been experiencing disinflation (i.e., a decrease in the rate of inflation). Global equity markets weakened amid increased macroeconomic uncertainty and persistent geopolitical concerns. As a result, we believe investors will remain focused on traditional investment fundamentals, which could benefit the fund's balanced EQV philosophy (conservative/sustainable growth with a quality orientation and valuation discipline).
Portfolio positioning
During the quarter, we initiated positions in the following stocks:
Compagnie Financière Richemont (XSWX:CFR, Financial) is a Swiss global luxury goods company with some of thebest brands in fine jewelry and high-end watches. We bought Richemont during a decline in its valuation due to disappointment in the slow recovery of China's consumers and weakness in US consumer trends.
BAE Systems (LSE:BA., Financial) is a large British defense contractor that has emerged stronger after cleaning upa contract backlog and strengthening its balance sheet. We believe BAE Systems has a favorable long-term outlook supported by rising defense budgets.
Kingspan (DUB:KRX, Financial) is an Ireland-based global leader in energy efficient, high-performance insulationboard and building envelope solutions. We believe the company is well-positioned to benefit from long-term trends toward energy efficiency. We used a valuation decline tied to commercial real estate concerns as an opportunity to initiate a position.
We added to the fund's position in Swiss consumer staples company Nestle (XSWX:NESN, Financial), taking advantage of its valuation declines amid the deteriorating consumer outlook.
We sold the following securities:
TGS (OSL:TGS, Financial) is an energy company in Norway that provides geoscience data products and services tothe oil and gas industry. We sold the fund's position when it announced a merger with PGS, which we believe changes the company's business profile from an asset-light business model with a strong balance sheet into an asset heavy model with higher leverage. Though this may be beneficial for the current business cycle phase, it is not a model we embrace in the energy segment.
Origin Enterprises (LSE:OGN, Financial) is an Irish consumer staples company providing agronomy advice and otheron-farm services and distributing farm inputs. Origin has faced difficult earnings comparisons to last year as prices of soft commodities (products that are grown and cared for) weakened following the big jump after the Ukraine invasion.
FDM (LSE:FDM, Financial) is a British multinational information technology consulting company.
We trimmed fund positions in several other stocks, including Irish health care company ICON (ICLR, Financial), Dutch energy company SBM Offshore (XAMS:SBMO, Financial) and British industrials company DCC (LSE:DCC, Financial). We trimmed ICON to manage the position size, but still like the stock long term. ICON has benefited from an improving demand environment across mid/large pharma customers and had an incremental increase in demand from the biotech industry. We believe this is a high-quality business run by a capable management team.
Performance highlights
Stock selection in industrials added to relative performance. Having no exposure in utilities and an underweight in information technology added to relative return. Geographically, an underweight in Germany and stock selection in the US contributed to relative results. Given a declining equity market environment, the fund's cash position added to relative results. Cash is by-product of our bottom-up stock selection process.
Conversely, stock selection in financials, consumer staples and energy were the largest detractors from relative results. An underweight in financials also hampered relative return. Geographically, stock selection in Spain, France and Ireland were leading detractors from relative performance.
Contributors to performance
Below are the largest contributors to absolute return for the quarter:
Novo Nordisk (NVO, Financial)
is a Danish pharmaceuticalscompany whose strong stock performance was driven by rising expectations for modern insulins such as Ozempic and Wegovy in treating obesity. Obesity appears to still be a relatively nascent market and penetration rates have remained low. We believe the demand for obesity drugs is likely to outstrip supply through the medium term, supporting strong topline fundamentals for Novo Nordisk. TotalEnergies (TTE, Financial) is a French global integratedenergy and petroleum company that has continued to execute well. Higher oil prices were the main performance driver this quarter.Danieli & C. Officine Meccaniche (MIL:DAN) is anItalian industrials company that is a leader in the production of steel plants.
Shell (SHEL) is a British oil and gas company thatalso benefited from the increase in oil prices during the quarter.
Detractors from performance Below are the largest detractors from absolute return for the quarter:
LVMH Moet Hennessy Louis Vuitton (XPAR:MC) is aFrench global luxury goods company whose stock suffered from disappointment with the slow recovery of China's consumers and US consumer weakness as the luxury industry normalizes after its buoyant recovery post-COVID. We see no impairment to the long-term desirability of LVMH's key brands. Pernod Ricard (XPAR:RI) is French international spiritscompany. The company's sales momentum decelerated as China's recovery disappointed and US trends slowed. We see no change to the company's strong brand equity and structural advantages.
Amadeus IT (XMAD:AMS) is a Spanish travel technologycompany. We trimmed the fund's position during the quarter due to its valuation. ASML (XAMS:ASML) is a Dutch global leader in thesemiconductor lithography industry. The stock's weak performance stems from concerns about deteriorating capital spending trends for semiconductor equipment and US/China trade tensions. We remain convinced that ASML is positioned to facilitate society's digitalization, electrification and automation.
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.
