Fund Review: Invesco and RBC O’Shaughnessy

Invesco’s U.S. fund lags, O’Shaughnessy leadership change

Every month in my Top Funds Report newsletter, I write a summary of my views about specific funds and fund companies based on queries from readers. These are often funds that have undergone management changes or are new issues, a little less well known, or not as widely covered as some of the high fliers. Here’s a recent roundup of my take on U.S.-focused equity funds from Invesco and RBC.

Invesco U.S. Companies Fund (AIM1743)

This Invesco offering has been around since 1999, under the Trimark banner. After Invesco acquired the Trimark funds, it rebranded them under the Invesco name, but this one at least is the same fund. It has reasonable one-year performance, despite recent stock market weakness, with a 5.6%, matching the category average of 5.1% to Oct. 31. Longer term, it excels, with a top-quartile 5-year average annual compounded rate of return of 13.8%, outpacing the peer group’s 11.9% annual return.

While manager Jim Young uses a similar approach to other Invesco funds in managing this one, he tends to have more of a growth tilt. At the end of October, he was overweight technology, healthcare, and industrials, and underweight consumer staples, consumer discretionary, communications services, and energy.

As part of his investment process, Young looks for companies that have distinct proprietary advantages, invest significantly to obtain a competitive advantage, and demonstrate consistently strong management and industry leadership.

The portfolio is concentrated, holding just over 40 names, with the top 10 making up 40% of the fund’s holdings. Top holdings include semi-conductor maker Mellanox Technologies Inc. (NASDAQ: MLNX), tech giant (and this week the world’s largest company by market cap) Microsoft Corp. (NASDAQ: MSFT), medical device firm Stryker Corp. (NYSE: SYK), semi-conductor company Analog Devices Inc. (NASDAQ: ADI), and industrial products firm Roper Technologies Inc. (NYSE: ROP).

At the end of October, the manager believed the market was fairly valued relative to interest rates and inexpensive compared with other asset classes. Within the fund the manager believes there is risk in some stocks that have moved ahead too fast and now have valuations that appear unwarranted, and says in a recent commentary, “Ultimately, there is a lot of room for rotation into more modestly valued companies.”

Volatility for this fund has been well above average, which makes it much less attractive on a risk-adjusted basis. My concern with this fund is that as the markets begin focusing on fundamentals, performance will trail because of its emphasis on growth names. If you have held this fund for some time, you may now want to consider taking some profits off the table. I continue to monitor it closely.

Change in Leadership at O’Shaughnessy Funds

Back in January, O’Shaughnessy Asset Management announced that market veteran and founder Jim O’Shaughnessy was stepping aside as CEO of the firm. Patrick O’Shaughnessy, Jim’s son, stepped into the role. Jim remains with the firm as Chairman and Chief Investment Officer.

In the role of CEO, Patrick will oversee the day-to-day business of the firm and will direct the firm’s initiatives in the areas of research, portfolio management, investor education, and client relationships.

Given the systematic focus of the investment process, this change is unlikely to have any impact on the investment management of the O’Shaughnessy funds. The investment process continues to screen the stock universe on factors that have historically been found in stocks that outperform. These include valuation, market cap, momentum, and return on invested capital, which includes dividends, share buybacks, and debt repayments. Stocks are scored on these factors and then ranked from most attractive to least attractive, with the portfolios being made up of the most attractive. It’ll take at least a year before we know whether the leadership change has any material effect on performance.

Of the RBC O’Shaughnessy offerings, the RBC U.S. Value Fund remains my favourite, but I am also a fan of the RBC O’Shaughnessy Canadian Equity Fund. I believe in the disciplined systematic process for the long-term, but there may be periods where these may lag the broader markets. I’ll keep monitoring these funds to assess any impact in the change of leadership.

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.