Market overview
- Economic uncertainty prevailed during the second quarter. As the global economy continued to expand, albeit slowly, equity markets were subdued and the quarter ended with significant concern about fallout from a possible Greek exit from the Eurozone.
- Greece cast its long shadow on European markets, despite indications that the European Central Bank’s quantitative easing program is starting to produce results. Emerging markets, particularly in Asia, faced headwinds from a slowing Chinese economy.
Performance highlights
- During the second quarter of 2015, Invesco European Growth Fund (Trades, Portfolio) Class A shares at net asset value (NAV) returned 4.34%, outperforming the MSCI Europe Growth Index, which returned 1.13% over the same period. (Please see the investment results table on page 2 for fund and index performance.)
- Stock selection in the financials, industrials and health care sectors drove the fund’s relative results. An overweight in the energy sector was supportive as well.
Contributors to performance
- Fund holdings in the financials, industrials and health care sectors outperformed those of the benchmark and were among the largest contributors to relative performance.
- Overweights in the energy and financials sectors (two of the index’s strongest performing sectors for the quarter) also added to relative return.
- Stock selection in the UK, particularly in the financials sector, contributed to both absolute and relative results. An overweight in the UK, which performed well during the quarter, was advantageous as well.
- Sky PLC (LSE:SKY, Financial) was one of the fund’s top performers for the quarter. Sky is a British-based, pan-European broadcasting company. The company reported solid quarterly results, with revenues and margins beating consensus expectations.
Detractors from performance
- From a geographic perspective, fund holdings in Italy and France were weak.
- Lack of exposure to the telecommunications sector detracted from relative results as well.
- The fund’s cash exposure, in a relatively strong market, was a drag on relative results.
- Kuoni Reisen Holding AG (XSWX:KUNN, Financial), the Switzerland-based travel company, was one of the fund’s largest individual detractors for the quarter. Kuoni reported a disappointing trading update that countered optimism arising from a first quarter announcement that the company would sell its tour operating assets. We believe the market’s reaction was overly negative. In our opinion, Kuoni is now a more focused business with a significant portion of its profits coming from its business-to-business online travel platform and visa processing divisions, both of which have enjoyed double-digit growth.
Positioning and outlook
- During the quarter, we added banking leaders Lloyds TSB Group (UK) and Israel Discount Bank (1.09% and 0.52% of total net assets, respectively). There were no liquidations during the quarter.
- In our view, the near-term investment outlook remains relatively mixed following a volatile second quarter that saw muted stock market returns.
- Within Europe, aggressive monetary stimulus has led to some improvement in economic data, including declining unemployment and higher prices. The euro rebounded during the quarter, but is still significantly weaker year over year, thus benefiting many exporters.
- However, uncertainty about the ongoing Greek debt situation is negative for investor sentiment and is likely to have a dampening effect on the economic recovery.
- Regardless of the macroeconomic environment, we remain focused on a bottom-up investment approach of identifying attractive companies that fit our EQV (earnings, quality, valuation) investment process.
