Manager perspective and outlook
- Despite a notable decline in April, global equities had a positive return for the second quarter as investors appeared to continue anticipating central bank interest rates cuts. The European Central Bank and the Swiss National Bank have started to ease monetary policy, while the Bank of England has kept rates the same amid sticky inflation in the services sectors.
- In contrast to the US where growth stocks related to artificial intelligence (AI) dominated, value stocks led returns in the UK and Europe. UK equities rose during the quarter, with domestically-focused small- and mid-cap stocks performing well. French equities were weak due to concerns about the outcome of the country's snap election and this affected equity results in the European region.
- Though global equities have continued to rise in some regions, we believe it is important to acknowledge that monetary policy has remained uncertain. Other potential risks for the remainder of 2024 include ongoing geopolitical tensions and elections around the globe. These potential risks may create market headwinds and may increase volatility as investors look for confirmation of a positive market transition. In this environment, 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:
Teva Pharmaceutical Industries (TEVA, Financial) is a global pharmaceutical business focused on generics, biosimilars and specialty medicines. While best known as a leading generics manufacturer, Teva has been building a substantial pipeline of branded drugs. After a period of transformation, we believe Teva represents an improving earnings and quality story. Management's outlook includes accelerating topline growth, rising profit margins, lower financial leverage and a valuation multiple that we believe has plenty of room for upside.
Edenred (XPAR:EDEN, Financial) is French payment service provider that specializes in pre-paid benefits such as tax advantaged employee meal vouchers or fuel cards. Edenred has a history of robust topline growth and attractive returns on capital. Recently, the company's historic valuation premium fell to a market discount due to concerns about the visibility and duration of its profitable growth algorithm. After reviewing regulatory risk, the competitive landscape, and the impact of moderating interest rates, we believe Edenred is likely to continue a path of profitable growth.
Arkema (XPAR:AKE, Financial) is a French global leader in specialty materials such as adhesives, advanced materials and coating solutions. Arkema has gone through a transformation over the past several years, shifting its product mix toward higher value-added specialty chemicals, while innovation has led to an improving mix of higher growth platforms. The company has been coming out of a sharp inventory destocking cycle, with some early signs of recovery in key end markets. We see scope for improving earnings and quality at Arkema, and we took advantage of the attractive valuation relative to its history and peers to reinitiate a position in the business.
Allegro.eu (WAR:ALE, Financial) is an ecommerce marketplace in Poland and Eastern Europe that we believe offers strong growth at an attractive valuation. The stock's valuation has been held down by apparent expectations that its private equity owners will continue to pressure the stock with further sell downs. We believe this pressure will eventually pass, and in the meantime, Allegro's market dominance has grown at a rapid clip.
We sold the fund's position in Swedish industrials company Sandvik (OSTO:SAND, Financial)as valuation rose due to the market's apparently favorable outlook for cyclical businesses. We exited the fund's position to make room for businesses we believe have better risk-adjusted return potential.
Performance highlights
The fund's consumer discretionary holdings outperformed those of the benchmark index and were the largest contributors to relative performance. Positive stock selection in financials and industrials added to relative results. Geographically, stock selection in Germany, Italy and Sweden had the largest positive effect on relative return. An underweight in Germany was also advantageous.
Conversely, stock selection in information technology, materials and communication services were the largest detractors from relative performance. Geographically, holdings in the US (categorized by country of risk) were the largest detractors from relative return. Stock selection in Switzerland and the UK detracted from relative return, as did an underweight in Switzerland.
Contributors to performance
Below are the largest contributors to absolute return for the quarter:
Novo Nordisk (NVO, Financial) is a Danish pharmaceuticals business exposed to strong structural growth trends tied to rising incidence of diabetes and obesity. Novo has benefited from demand for its differentiated GLP-1 products for diabetes and more recently from accelerating demand for Wegovy, its GLP-1 drug to treat obesity.
Investor AB (OSTO:INVE A, Financial)is an investment holding company. The company combines a portfolio of high performing blue-chip publicly listed companies with a group of structurally growing private health care and technology businesses. We trimmed the fund's position during the quarter due to the stock's valuation.
Detractors from performance
Below are notable detractors from absolute return for the quarter:
LVMH Moet Hennessy Louis Vuitton (XPAR:MC, Financial) is a French luxury company with prestigious brands including the eponymous Louis Vuitton, Moet & Chandon, Hennessy, Bulgari and Tag Heuer. Luxury stocks have faced performance challenges since luxury trends peaked in mid-2023. Hopes for a second half recovery have come into question, particularly in China where consumer sentiment has remained weak.
CRH (CRH, Financial) is a global leader in building materials, aggregates and cement. The company generates the majority of its sales in the US. The stock's performance benefited from a recent relisting in the US but took a step back in the second quarter after more than doubling since late 2022. Underperformance was driven by concerns about US trends (weak housing data and poor weather), combined with some forced selling after the company was removed from European indexes.
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.
