Kevin Holt, Chief Investment Officer, Invesco US Value Equities
Often, market volatility can lead to value opportunities as company fundamentals and attractive valuations are typically ignored in a sell-off, and even quality companies fall with the rest of the market. Currently, we’re assessing company fundamentals and valuations on a stock-by-stock basis to see whether there are any attractive opportunities that fit our approach. Those assessments will vary based on the type of value strategy — there are many ways to be successful, and intellectual independence is a core value across our teams.
Invesco’s US Value complex includes four broad strategies. Each has a distinct approach to evaluating companies:
- Our relative value strategies look for companies that are experiencing a positive catalyst and are inexpensive relative to the market, applicable sector and their own history.
- Our deep value strategy is a contrarian approach that utilizes a long-term investment time horizon (typically, four to five years) to take advantage of significant discounts of the current stock market price and the underlying value of a company, using different valuation metrics depending upon the growth or cyclical nature of the business.
- Our flagship dividend value strategy closely evaluates companies’ total return profile, emphasizing appreciation, income and preservation over a full market cycle.
- Our intrinsic value strategies use a traditional intrinsic value approach in which the goal is to create wealth by maintaining a long-term investment horizon and investing in companies that are significantly undervalued on an absolute basis, using consistent valuation assumptions for all businesses.
The portfolio managers for these four distinct value approaches are staying true to their processes and capitalizing on value opportunities as they find them.
Ron Sloan, Chief Investment Officer of Invesco Global Core Equities
Global markets have become extremely volatile due to an old-fashioned growth scare in developed countries, as the opportunity to find organic earnings growth has become quite limited. Companies that were benefitting from fast-growing emerging market economies (for example, commodity-related industries) have seen a meaningful decline in demand in the past few years, and the trend does not appear to be slowing.
For the market to continue its multi-year climb, I believe it will have to be driven by earnings growth, and not valuation or central bank maneuvers. And, new leadership in the market will be required. Earnings estimates are collapsing, and should be expected to continue to drop into 2016. “Where can you find earnings growth?” is the question my team focuses on every day, but particularly now. While we are not expecting the US economy to enter a recession, meaningful earnings growth is likely to be limited to a few select segments of the market.
Groups that we find encouraging at this point include home builders (and their derivative beneficiaries), “old” tech companies (versus a few very high profile and arguably overpriced internet-related companies) and select consumer cyclicals (several retailers, for example). While we are quite constructive on some high-quality financials, we believe that, at this stage of the market, it is too early to be aggressive for the broader sector. We are also cautious in some areas of recent strength such as autos, as we believe inventory build-up has likely created a headwind for near-term earnings.
A key differentiator for us is identifying companies that are investing in their business, and focusing on long-term growth as opposed to financial engineering (stock buybacks) for short-term results. We believe we are entering a stage of the market that will demonstrate greater differentiation between companies, particularly in regards to quality of management — as well as differentiation among investment managers’ processes and how they approach the market.
Scott Wolle, Chief Investment Officer, Invesco Global Asset Allocation
Recent market volatility took many investors by surprise. As risk-parity managers, my team aims to stay ready for the events that no one is expecting. August’s elevated volatility does not affect our investment approach.
Our balanced-risk approach seeks to mitigate the effects of negative surprises and take advantage of opportunities in an efficient and effective way. The aim is to provide investors with a smoother ride through the three phases of the economic cycle — inflationary growth, non-inflationary growth and recession. We strive to achieve this objective in three primary ways:
- Each asset class exposure — stocks, bonds and commodities2 — is built by considering the key drivers of return specific to that asset class.
- We combine these asset classes based on the amount of risk they may contribute to the portfolio. (Whereas other strategies, such as 60/40 portfolios, allocate a certain percent of capital to each asset class, regardless of their risk contribution.) We believe true diversification is key to limiting downside risk.
- Markets move in cycles, so we make tactical adjustments, seeking to take advantage of these cycles, allowing us to be more adaptive to the current environment.
When we build our balanced-risk portfolios, we think first about economic outcomes and which assets could best defend or take advantage of each. We next consider the liquidity, diversification benefit, and evidence of a risk premium for each asset. We believe this results in a portfolio that has the opportunity to prove resilient in challenging environments, ample liquidity, and diversification.
David Millar, Head of Invesco Multi Asset
The events of the past few days have underscored the unpredictability of financial markets and the importance of portfolio diversification. With an uncertain market outlook, which could include several catalysts for increased volatility, the Multi Asset team believes it’s important for investors to include sources of returns in their portfolios that could complement, but behave independently of, the traditional stocks and bonds they may already own.
The team believes the best way to achieve this type of diversification is to break away from the focus on asset class constraints that often distract from fundamental long-term thinking and focus on finding good investment ideas. The team has the flexibility to search globally for these ideas across a wide array of asset classes, geographies, sectors and currencies. This allows us to invest in things that may work, even when traditional markets may not. For example, investing in volatility as an asset class — by buying volatility instruments — could potentially increase the defensive exposure in the portfolio, even as traditional safe haven assets come under pressure.
We have an absolute return mandate that includes a target return of 5% above three-month US Treasuries over a rolling three-year period, with a target volatility of less than half that of global equities, over the same rolling thee-year period. We seek to achieve these targets by investing in a portfolio of ideas that the team believes work best together. At the same time, we also evaluate each idea in the context of possible but highly unlikely events (not unlike the one we just experienced). Why does this matter? Because as we just saw, in this type of environment, we believe it’s important not only to align a portfolio with what we think will work, but also to structure the portfolio for when we might be wrong.