Invesco Perpetual Global Equity Income Fund launches

The Invesco Perpetual Global Equity Income Fund is a diversified global equities fund that seeks to achieve a total return of income and capital growth by investing in the best investment ideas of all the regional equity specialists based in Henley. Paul Boyne, the fund manager, is looking to target a dividend yield above that of the MSCI World Index. For the market (as represented by the MSCI World index), we have forecast a dividend yield of around 3.4%. This is based on an estimated 14% cut to dividends from the current ‘backward looking' market yield of 3.9%.

The fund's unconstrained mandate offers exposure to the stock ideas selected from Invesco Perpetual's UK, Europe, US, Japanese, Asian and Emerging Market equity investment teams, but can also select an equity investment not owned by these teams if, in Paul Boyne's analysis, there is a compelling reason for its inclusion. The fund's style is active and pragmatic, with no inherent bias towards particular sectors, stocks, styles or market capitalisation ranges. Sector weights are a consequence of the stock investment decision, but no single sector may account for more than 30% of the fund. Regional weights are a consequence of stock investment decisions. We will not be allocating the portfolio from the top down in any way.

It is our intention to invest in high quality companies offering visible growth and attractive valuations, with a focus on companies generating strong free cashflow and utilising a progressive dividend policy, share buybacks, or a value enhancing growth strategy. We will seek to invest into securities that, in aggregate, have the opportunity to provide an above-average market yield over the medium term.

The Henley management team and the fund's investment strategy

The strength of the Henley investment team is both its breadth and depth. The investment team have an active and unconstrained investment philosophy. This investment approach allows the fund managers freedom to search out investment opportunities, without restriction. Our fund manager longevity far exceeds the average industry tenure, and a number of our fund managers have demonstrated an ability to deliver superior long-term returns for investors.

Between them, the investment teams currently invest in around 500 companies across 38 global stock markets. Each company is well known and understood by the relevant regional investment team. The fact that we can take a global universe of over 3000 stocks and distil our choices down to 500 companies provides an initial filter for the fund's primary universe. The Invesco Perpetual Global Equity Income Fund will hold between 60 and 100 stocks, and we currently anticipate that it will normally hold around 75, each of them based on their relative merits. Included among the investment traits we prefer in our equity holdings are: strong and recognised brands, defendable franchises, healthy balance sheets, strong cashflows and good to above-average yields.

Some examples of stocks which Paul Boyne has included in his notional portfolio include:

Johnson & Johnson - a US company with a strong franchise in the consumer staples and medical technology areas, which includes pharmaceutical businesses. The company has a solid cashflow, a strong balance sheet and has a dividend yield of approximately 3%.

Philip Morris International - less than a year old after being spun out of Altria, this is another US company with a strong franchise through its portfolio of well-known tobacco brands. Again, this company has high cashflows, but it also benefits from the geographical diversification of its revenue streams, which includes significant emerging market exposure. It currently has a rising dividend.

Nestle - this well-known European company has a number of quality franchises in the confectionery, bottled water and pet food areas. It has strong cashflows and is on course to be debt-free by around the end of 2010.

Honda - the Japanese auto company, renowned for production excellence and leading edge technology has presented us with what we believe is a very attractive valuation opportunity. The companies price-to-book multiple is at a 50% discount to its 20-year average. When Honda's market normalises (even without an upward trend in growth), we expect its valuation and earnings' multiples to both expand and with them its share price.

Why invest globally?

There are numerous reasons to consider investing into global equities alongside investments into UK equities. We live in an integrated global economy, so there is an opportunity to look beyond your local market and the restriction it places on your investment opportunities. Our lives are internationalised, benefiting from the steady reduction in trade barriers over the last 50 years, and the products we buy are international, covering everything from cars to cotton buds.

Although the global economy is contracting at the present, globalisation will continue through expanding trade and technological advancement. Companies are less likely to be domestically focused, and international competition has intensified. With this comes significant investment choice which provides global investors, such as ourselves, with the opportunity to invest into the best companies, regardless of their location. For example, for each local telecommunications stock, there are at least 30 alternatives globally and this represents an expansion of opportunity. By enlarging the investment universe beyond a single country or region, the best valuations and the best investment conditions can be targeted.

The equity universe has steadily become more diverse. In 1970, the US Equity market accounted for 66% of the world equity market, by this year the figure has dropped to 44% and is projected to continue to fall to 30% over the next 20 or so years. Another significant plus point is the chance to diversify risk. Global returns have been similar to the UK since the early 1970s, but the risk associated with that return is calculated to be significantly less.

Over the long term, it is the reinvestment of dividends or income rather than capital growth that has contributed the dominant part of the total return which shareholders have received through investing in equities, after accounting for inflation. It has also been determined that stocks with sustainably high dividend yields deliver, on average, the strongest returns. Currently, we feel that there is an opportunity to buy companies which are producing high and sustainable dividend yields. With stockmarkets having fallen, the choice of higher dividend yielding companies has broadened greatly. The dependence on financial stocks for higher dividend yields has come down, and we are able to invest across a broad spectrum of sectors in a broad range of countries in our search for above-average yields.

Why dividends are important - income reinvestment makes up a major proportion of total returns

We recognise that earnings and dividends have been, and still are being, cut across the globe, particularly in the financial sector which has historically been a major source of higher yield shares. However, there are excellent prospects for the asset class, with global equity markets yielding more now than they have for a generation. High quality blue-chip dividend yields of 4% to 5% look favourable when compared with history and even when compared to sovereign debt and cash, although inevitably being equities they carry substantial additional capital risk. Few dividend streams are wholly safe, but the current equity market weakness gives investors such as ourselves the opportunity to lock in to secure dividend streams for the medium-to-long term. We are very careful with our investments, as we recognise that the highest yielding stocks generally imply that a dividend cut is on the offing, and we discount these companies from our considerations. Instead, we prefer companies with solid balance sheets and the ability to sustain their dividend policies, as well as being led by quality management teams.

Global income investing is still a young asset class, but it is developing. The percentage of companies paying dividends is increasing as structural considerations, including reduced dividend taxation, have encouraged dividend issuance and management have become more aware of the importance of providing income for their investors. This in turn encourages management discipline, especially for those using a steady or increasing dividend policy.

In many markets, we see collapses in earnings being priced into shares, and price-to-book and price-to-earnings ratios of many income-producing companies are at their lowest for decades.

Summary & outlook

Over the last 10 years, equity investors have experienced poor returns from the asset class, when compared to previous terms. Periods of underperformance as we have seen over the last decade are, however, not uncommon in the context of the last 100 years, and whilst the markets are extremely unpleasant, we can become more optimistic on the outlook for the equity market over the next 10 years. The volatility of the market will remain high for the near term; however, we believe that the market is moving to price ‘survivability'. Strong companies that survive will be presented with numerous opportunities.

Going forward, we believe that there will be significant opportunities for high-quality businesses with sustainable and defensible franchises to outperform their more-mediocre peers. In the current recession, company returns are falling rapidly, on aggregate. However, we believe the cyclical earnings decline is now to a great extent priced into equity markets. By a number of measures, equities are cheap. As hedge funds and other investors have had to sell their more liquid assets in order to fund withdrawals, there are now many high-quality companies trading at their most attractive valuations for decades.

While stockmarket conditions are likely set for continued volatility, there are a number of factors that lend encouragement for investment. These include the significant monetary and fiscal stimulus that is currently being applied globally; the large fall already seen in stockmarkets; heightened levels of investor caution; lower rates of corporation tax, and lower energy and commodity input prices; the record number of companies reaching 52-week lows - a sign that markets may be reaching a bottom; and an official recession. Stockmarkets generally hit their lows before economies begin to recover, and this often happens by the time a recession is officially declared.