Invesco WS Global Targeted Returns A (GTU0109AU) Report & Performance

‘Inflation – Short UK’ has been the strongest performer, recovering a portion of the losses accrued over the course of the year. The appointment of new Prime Minister Rishi Sunak and his new more conservative fiscal policy were welcomed by markets, allowing investors to pare back some of the very elevated inflation expectations that had been priced in as a result of the “mini-budget announcement from the Truss administration. This idea has now been removed from the portfolio.

‘Currency – New Zealand vs Australia’ also delivered positive results for the fund. Slowing demand out of China for Australian exports, declining commodity prices and the RBA’s ongoing signalling to markets over its unwillingness (or inability) to hike rates at the same pace as the Fed or the ECB have exercised a negative pressure on the Australian dollar over the period. The recently introduced ‘Equity – Equity Dividends’ idea also contributed positively, largely benefitting from a recovery in risk appetite over the month.

US CPI saw a mild surprise to the upside in September at 8.2% compared to consensus of 8.1%, with European inflation also coming in hotter than expected. This contributed to bond yields moving higher. Our ‘Interest Rates – US long term’ idea detracted as a result. After a strong period of positive performance, our ‘Volatility – FX Volatility’ idea pared back some of the gains in October. ‘Equity – European Infrastructure’ also came under pressure over the month due to ongoing energy crisis in Europe and tensions between Russian and the West.

Our long exposure to the US Dollar performed strongly, as risk averse investors sought a perceived “safe haven” currency. Expectations that the Fed would hike rates more aggressively than other central banks supported the dollar on a relative basis. ‘Currency – US Dollar vs Asia’ was the strongest performing idea. Increased recession fears and downside economic risk favoured exposure to more resilient businesses in the US with stronger balance sheets over those constrained by weak cash flows, refinancing issues and debt servicing. ‘Equity – Strong Balance Sheets vs Market’ benefitted as a result.

The increased divergence in monetary policy expectations across regions has led to an increase in the level of volatility among currencies, benefiting our ‘Volatility – Global FX Volatility’ idea. ‘Interest Rates – Australia vs US’ was another notable performer over the quarter as short term yields in Australia fell more than their US counterpart on the back of dovish comments from the Reserve Bank of Australia which indicated that it will moderate the pace of tightening going forward as economic growth slows and housing activity moderates. After a difficult period in August, ‘Inflation – Short UK’ recovered the bulk of the losses in September.

Persistent inflation and more hawkish central banks than expected meant that fixed income and risk assets faced increased headwinds. The fund’s long credit ideas detracted from overall performance being negatively impacted by widening credit spreads and rising bond yields. ‘Credit – US High Yield’, ‘Credit – US Investment Grade’ and ‘Credit – Selective Credit’ all detracted by a similar order of magnitude. The rise in bond yields also exercised a negative pressure on our ‘Interest Rates – Selective EM Debt’ and ‘Interest Rates – US’ ideas.

Being long the US Dollar was a positive contributing factor, with the currency being buoyed by its perceived ‘safe haven’ status coupled with expectations that the US Fed would be more aggressive in their tightening path relative to other central banks. Our long US Dollar positions vs a basket of Asian currencies, the South African Rand and the UK Pound contributed the most. ‘Equity: European Banks’ also delivered positive results as we were able to reduce our exposure and lock in gains before markets started to sell-off in the second part of the month.

‘Inflation: Short UK’ was one of the largest detractors in August as another jump in food and energy prices helped exacerbate inflation in the eurozone to multi-year highs. ‘Interest Rates: Global Steepener’ also detracted from overall performance after short-end rates spiked relative to long-end rates as investors digested hawkish comments by Federal Reserve Chair Jerome Powell at the central bank’s annual symposium in Jackson Hole. Given the move higher in bond yields, ‘Interest Rates: US’ also ended the period in negative territory. Directional ideas within credit, most notably ‘Credit: US Investment Grade’ and ‘Credit: Selective Credit’ underperformed given the move higher in bond yields and a widening of credit spreads.

Our ‘Inflation – Short UK’ idea registered a steady recovery following May’s decline as investor’s may be starting to price in the possibility of peak inflation. Given its defensive characteristics, ‘Equity – Strong Balance Sheets vs Market’ benefitted from the negative market environment as more resilient businesses with stronger balance sheets outperformed those constrained by weak cash flows, refinancing issues and debt servicing. ‘Currency – US Dollar vs Asia’ and ‘Currency – US Dollar vs UK Pound’ contributed the most. The increased divergence in monetary policy expectations across regions has increased the level of volatility within currencies, benefitting our ‘Volatility – Global FX Volatility ‘ idea.

At the other end, ‘Credit – US High Yield’ and ‘Credit – Selective Credit’ were amongst the main detractors over the period, being negatively impacted by a material widening in credit spreads and rising bond yields. Directional equity ideas also came under pressure in June with ‘Equity – European Infrastructure’, ‘Equity – European Banks’ and ‘Equity – Diversified Alpha’ leading the losses.

The Fund returned -4.09% in May 2022.

• The moves of major currencies during the first half of the quarter were partially reversed in May as China began to loosen its Covid-19 restrictions, and European central bankers took a more hawkish tone. During the month, the euro bounced off its five-year lows versus the US dollar, and the Australian dollar broke its one-year low versus the US dollar. P/E’s factors continue to indicate stronger growth in the US versus other parts of the world, and a strengthening of the US dollar, especially against the euro and the yen. • Currently, the main factors driving FX positioning are 1) relative growth expectations, where countries with higher growth expectations are more attractive, 2) long term rates, where higher rates are more attractive, and 3) capital flows, where investors have been buying US assets versus those of Europe or Asia.

From a factor and style perspective, Growth underperformed the most as bond yields continued to rise, challenging the lofty valuations of some of these names under this new higher rate environment. Subsequently, the technology sector was the worst-performing. At the other end, defensive parts of the market, as well as Value sectors, fared better, e.g., consumer staples, utilities, health care, and energy. It was also a challenging month for bond markets with spiraling inflation putting further pressure on central banks to apply a more aggressive approach to raising interest rates. Against this backdrop, US treasuries extended their losing streak for a fifth straight month. Sovereign bonds in Europe also lost ground. In terms of yields, the 10-year Treasury note increased from 2.34% to 2.93%, with 10-year gilts moving from 1.61% to 1.91% and the 10-year German bund rose from 0.55% to 0.94%.

As highlighted earlier, the US Dollar performed strongly over the month, benefitting our ‘Currency – US Dollar vs Asia’, ‘Currency – US Dollar vs UK Pound’ and ‘Currency – US Dollar vs Euro’ ideas. The substantial repricing of interest rate hike expectations was a natural catalyst for a move higher in volatility across asset classes, including FX. Our ‘Volatility – Global FX Volatility’ idea performed well against this backdrop. The defensive characteristics of the ‘Equity – Strong Balance Sheets vs Market’ idea proved to be useful during a period where negative investor sentiment dominated market price action. At the other end, ‘Currency – Japanese Yen vs US Dollar’ was the main detractor in April as modest inflation in Japan relative to the US prompted the Bank of Japan to continue to keep interest rates at current or lower levels for the foreseeable future. As a result, the Yen depreciated to multi-year lows against the Dollar. ‘Interest Rates – Emerging Market Debt’ also detracted from performance with our long exposure to local currency Mexican government bonds (currency hedged) proving to be the main drag. Sentiment towards Mexican debt deteriorated over the month driven by higher interest rate hike expectations after data showed annual inflation touching multi-decade highs. The spread to US Treasuries has however remained flat over the year. ‘Interest Rate – Yield Compression’ was another detractor with ‘Equity – China’ and ‘Credit – US High Yield’ also naturally underperforming in light of the risk-off market environment.