Our investment mandate is to act as a foundation within a diversified portfolio, seeking to deliver strong upside participation with stronger downside protection and adding value with less risk over a full market cycle versus the Russell 1000 Value Index.
Delivering for investors with a diversified dividend strategy
The six of us conduct primary research within assigned sectors and industries. On average, we bring 22 years of experience in the industry and 15 years with Invesco. We are all investors.
It's hard to replace the value of time and experience that comes from managing through multiple cycles. This positions us to see past much of the short-term noise in the markets.
Yes. It means that we are spending more time understanding the drivers of operating leverage to assess the sustainability of earnings. For example, companies have utilized technology to enhance supply chains and improve productivity this cycle. These are more sustainable drivers of earnings longer term. In contrast, cutting R&D and/or reducing capital expenditures to maintenance levels may not lead to enduring operating leverage improvement.
Patience is a virtue. Clearly, the opportunity set is not as wide as it was in 2009 and 2010, but there are always dislocations worth evaluating. These dislocations are different each cycle. Currently, there are emerging investment opportunities based on valuations in the energy and industrial sectors.
Our process is based on fundamental research from a bottom-up perspective. We do not make investment decisions based on predictions of interest rates, commodity prices or exchange rates. However, we are not agnostic to the impact of macro issues on our thesis. This is seen in how we use scenario analysis to assess the potential downside, stressing the key drivers of our financial models to ensure we understand the risk-reward profile of each investment.
The strategy is employed over the full market cycle, meaning it is not adjusted opportunistically. The three components that our process emphasizes – appreciation, income and preservation – are key tenets throughout the cycle. Focusing on total return helps us consistently deliver on our mandate to serve as a conservative foundation in an equity portfolio.
We maintain exposure to all 10 sectors at all times, and as a safeguard, we limit our exposure to less than 25% in a single sector and limit individual holdings to no more than 4% at cost. Minimizing downside risk is a key tenet of our process. We perform a rigorous risk-reward analysis on both new and current holdings, and we are focused on the strength of the balance sheet and cash flows.
We continuously monitor our assessment of the fair value of each stock to determine if trimming or exiting a position is warranted.
It goes back to the scenario analysis we do for cyclical stocks. We model the normalized earnings power in a bull, base and bear case scenario over a two- to three-year holding period. In the bear case, we stress the key drivers of our financial models to develop an understanding of the potential downside risk to our thesis.
We believe that our portfolio is a conservative foundation for an investor's broader portfolio. How deep the foundation is a function of the investor's risk tolerance and time horizon.