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Trust Insider: an under-the-radar Invesco trust arbitrage

Trust Insider: an under-the-radar Invesco trust arbitrage

While the launch of Neil Woodford’s new fund management company has been hogging the headlines, I thought I would look at one of the more obscure funds run by his former home, Invesco Perpetual.

Invesco Perpetual Select Trust was born in 2006 after the reconstruction of Merrill Lynch Asset Allocator. It is an umbrella vehicle, a structure that comes into its own if investors fear triggering capital gains tax (CGT) but want to be able to switch between asset classes, to match changes in their risk appetite or to time markets.

Invesco Perpetual Select is essentially four funds in one – UK Equity (IVPU), Global Equity Income (IVPG), Balanced Risk (IVPB) and Managed Liquidity (IVPM). Each class has its own portfolio, run by managers who are experts in those fields. The first two use moderate amounts of gearing to enhance returns but, for IVPB, gearing cannot exceed 5% and gearing is not permitted on IVPM.

I would expect the board is keen to keep gearing under control but, from a legal standpoint, Invesco Select is one company and so, in an extreme situation, shareholders of the other classes would be liable if one of the geared classes defaulted on its debt.

The fees are 0.25% on net assets for IVPM and 0.75% on the other classes. There is a performance fee on the two equity classes. Capped at 0.75%, the fee kicks in if the managers beat their benchmarks by at least 1%, and is 12.5% of the excess return.

The UK Equity portfolio is managed by Mark Barnett (who is also manager of Woodford’s old funds) with the aim of maximising long-term total returns. Like other funds in the Invesco stable, IVPU’s composition is driven by stock selection and without much reference to the benchmark, which in IVPU’s case is the FTSE All-Share.

Though IVPU doesn’t have a growth and income remit, Barnett’s investment style is pretty consistent across all the funds he runs and so IVPU’s portfolio looks a lot like that of Edinburgh Investment Trust or Keystone. Despite its name IVPU even has exposure to overseas equities. His performance record is pretty good, boosted recently by a large holding in AstraZeneca, and, maybe for that reason, this is the biggest of the four classes.

The global class, IVPG, aims for growing income and capital appreciation over the long term from a diversified portfolio of global equities. Over the past year or so, under the management of Nick Mustoe, it has outperformed the MSCI World index.

The balanced risk portfolio replaced one that was managed in a fund of hedge fund style by Fauchier Partners. This fell out of favour after failing to protect its NAV during the credit crisis, like many other listed funds of hedge funds. IVPB invests in debt and commodities as well as equities with the aim of minimising the downside and performing even in adverse economic conditions.

The balance of IVPB, run by Scott Wolle, is determined by the manager’s estimate of the risk contribution from each of the three investment types and is mostly invested in ETFs but with an overlay of derivatives (IVPB will not run net short positions).

Finally, the cash proxy, IVPM, managed by Stuart Edwards, invests mostly in money market funds authorised as Ucits schemes and is designed to be as safe as Invesco can make it. Given where interest rates are at the moment, Edwards has been hard pressed to generate much of a return in recent years.

Four times a year, at the start of February, May, August and November, shareholders can switch between the different classes.

The switch is not classified as a disposal for CGT purposes, though bear in mind HM Revenue & Customs can always change its mind, and the conversion ratio is calculated based on net asset values.

That latter point means there is a natural arbitrage between the different share classes. The discount on each class must be kept within a fairly narrow range so the board ensures the options available to shareholders remain relevant, and has changed the remits of two of the classes in the past.

At the tactical level, the board uses share buybacks into Treasury to try to keep the discount on each class as close to zero as is practical. In practice, this has meant the fund has shrunk a little but the board is keen to see it grow again.

Individually, the different classes may appeal to some investors but the strength of this fund is in its structure. In theory, if there is demand, the board can introduce other share classes and this flexibility ought to maintain its appeal. I think it is under the radar for many investors, however.

James Carthew is a director at Marten & Co

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