Invesco | Ten-Year Fund Anniversary Marked by Strong 2012

Session Expiration Warning

Investor Home > Insights & Commentary > Investment Insights

Tools:

Insights & Commentary

Ten-Year Fund Anniversary Marked by Strong 2012

Invesco Diversified Dividend Fund year-end portfolio review

The end of 2012 commemorated our team's 10-year anniversary managing Invesco Diversified Dividend Fund. It was a strong year for the portfolio and equity markets as companies have done an admirable job of managing their businesses through myriad economic challenges in recent years. This is evidenced by the recovery in corporate profits when compared to the recovery in GDP growth.

Within our discipline, several sectors offered notable opportunities in 2012. For example, our investments produced a median dividend increase of 10%, and 76% of our holdings raised their payouts.¹ Looking forward, our portfolio is focused on defensible businesses with operating profit margin sustainability and prudent capital allocation.

Sector Standouts

In 2012, financial sector investments made the largest contributions to the fund's returns. The fundamentals of financial stocks have improved, yet valuations remain depressed given the uncertainty in Europe and the lack of transparency around regulatory reform. We expect financial companies to benefit from a continued recovery in loan demand and improving credit metrics. We also anticipate that financials will grow their dividend payouts.

The utility and consumer staples sectors were two of our largest areas for new investments. Within utilities, our investments were biased toward natural gas and nuclear generation stocks, which trade at lower valuations than their more diversified electric utility peers. We added to several of our existing holdings and established two new positions in this sector.

Margins in the consumer staples sector largely remained stable or increased in 2012. The sector currently has an operating margin of 9.3%, which is below both its 10-year average of 9.5% and its peak of 13% in 2003. Valuations are in line with levels seen at this point in prior cycles, and dividend stability and growth are among consumer staples companies' priority uses of capital.

Positioning and outlook

In recent years, operating leverage has been impressive due to prudent cost management, low wage growth, restrained capital expenditures, offshoring and low interest rate expenses. After nine consecutive quarters of positive incremental improvements, margins for S&P 500 Index companies turned negative in the fourth quarter of 2012 as the result of tepid revenue growth and fewer costcutting opportunities.

We believe negative incremental margins are more of an issue in cyclical businesses. We're also more confident in the durability of margins in more stable growth sectors of the marketplace. As we navigate 2013, we remain focused on companies that offer an attractive total return profile, emphasizing appreciation, income and preservation.

Sources: Invesco, FactSet. Data from Manager inception Dec. 31, 2002, through Dec. 31, 2012, and is based on the median dividend increase of the fund's holdings. Median is defined as the numerical value separating the higher half of a sample from the lower half. This measurement is not a quotation or forecast of the fund's performance. Holdings are subject to change.

The opinions expressed are those of the author, are based on current market conditions as of January 2013 and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

All data provided by Invesco unless otherwise noted.

The S&P 500® Index is an unmanaged index considered representative of the US stock market. An investment cannot be made directly in an index.

Past performance cannot guarantee comparable future results.

About Risk

Common stocks do not assure dividend payments and the amount of a dividend if any, may vary over time. There can be no guarantee or assurance that companies will declare dividends in the future or that if declared, they will remain at current levels or increase over time.

If interest rates fall, it is possible that issuers of debt securities with high interest rates will prepay or call their securities before their maturity dates. In this event, the proceeds from the called securities would likely be reinvested by the fund in securities bearing the new, lower interest rates, resulting in a possible decline in the fund's income and distributions to shareholders.

The issuers of instruments in which the fund invests may be unable to meet interest and/or principal payments. This risk is increased to the extent the fund invests in junk bonds. An issuer's securities may decrease in value if its financial strength weakens, which may reduce its credit rating and possibly its ability to meet its contractual obligations.

The dollar value of the fund's foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

The fund's foreign investments may be affected by changes in the foreign country's exchange rates; political and social instability; changes in economic or taxation policies; difficulties when enforcing obligations; decreased liquidity; and increased volatility. Foreign companies may be subject to less regulation resulting in less publicly available information about the companies.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

The fund may accept investments from funds of funds, as well as from similar investment vehicles, such as 529 Plans. A "529 Plan" is a college savings program that operates under Section 529 of the Internal Revenue Code. From time to time, the fund may experience large investments or redemptions due to allocations or rebalancings by these funds of funds and/or similar investment vehicles. While it is impossible to predict the overall impact of these transactions over time, there could be adverse effects on portfolio management. For example, the fund may be required to sell securities or invest cash at times when it would not otherwise do so. These transactions could also have tax consequences if sales of securities result in gains, and could also increase transaction costs or portfolio turnover.

The investment techniques and risk analysis used by the fund's portfolio managers may not produce the desired results.

The prices of and the income generated by the fund's securities may decline in response to, among other things, investor sentiment, general economic and market conditions, regional or global instability, and currency and interest rate fluctuations.

The fund emphasizes a value style of investing, which focuses on undervalued companies with characteristics for improved valuations. This style of investing is subject to the risk that the valuations never improve or that the returns on value equity securities are less than returns on other styles of investing or the overall stock market. Value stocks also may decline in price, even though in theory they are already underpriced.

FOR US USE ONLY

NOT FDIC INSURED

MAY LOSE VALUE

NO BANK GUARANTEE

NOT FDIC INSURED

MAY LOSE VALUE

NO BANK GUARANTEE

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisers for a prospectus/summary prospectus.

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.'s retail products. It is a wholly owned, indirect subsidiary of Invesco Ltd.

Invesco Distributors, Inc.