Back to business after invesco’s year to forget

It is hardly an overstatement to say Invesco has been in the wars lately. The firm has been fighting battles on two strategic fronts with mixed fortunes. In the US theatre of operation, Invesco has suffered a severe blow to its reputation as a result of being embroiled in a mutual fund trading scandal.

The affair cost the firm dearly – a $450m (E350m) settlement with the Securities and Exchange Commission, the resignation of Charles Brady as chief executive of parent company Amvescap, the banning from the financial industry of former group chief executive of Invesco Funds Raymond Cunningham, the dropping of the Invesco brand name for US retail investors and a credit rating downgrade from Standard & Poor’s (S&P).

On the European front, the firm has been struggling to reverse the poor performance of its offshore-based Invesco GT series of funds.

According to S&P a number of Invesco GT funds significantly underperformed their sector average and benchmark over one, three and five years. The Invesco GT Global Bond Fund returned -7.98 per cent in the five years to mid-September, compared to the 18.2 per cent posted by the Citigroup WGBI index.

Equity funds fared no better. The Invesco GT Pan-European Fund also performed badly over three and five years compared with its sector average and benchmark. The MSCI Europe index returned -8.63 per cent in the five years to mid-October versus a dismal -29.19 per cent, registered by the Invesco GT Pan-European fund over the same period.

Not a great calling card, one might think, for a company promoting, among other products, its European equity investment capability in Europe.

Management changes

Jean-Baptiste de Franssu, chief executive for Invesco Continental Europe, says the firm has taken several steps to improve performance. This included management changes at Invesco Perpetual and the revamping of an offshore equity fund range, which paid a heavy price for taking some aggressive positions at the height of the tech stock boom.

He notes that some of the offending funds have been closed while others have had their investment objective modified.

Mr de Franssu says: “You can’t blame the fund managers. Some of them had such strict investment guidelines that all they could do was buy tech stocks.”

He claims that the Invesco fund range today is fundamen�tally different to what it was a year ago. “We have paid the price. But we are coming back. The best sign of progress is the quality of our performance in European equities, because it is the sector where we suffered the most.”

Certainly, Invesco has achieved a dramatic turnaround in performance in the last year or so. The Invesco GT Pan-European fund has notched up a much-improved 11.84 per cent in the 12 months to mid-October versus 12.02 per cent returned by the MSCI Europe index.

The recovery has not gone unnoticed. S&P recently awarded the fund an A (New) rated status in recognition of top decile returns delivered by the new fund managers, John Surplice (European equities) and Martin Walker (UK equities). S&P notes that the fund is now run by the investment team based in Henley, UK, for which Mr Surplice has worked since 1995.

Regardless of fund manager changes, the excellent performance of some Invesco Perpetual funds – notably European equities and global bonds – over the last five years stands in stark contrast to the Invesco GT franchise.

Mr de Franssu believes European equity will remain a core asset class for European investors. He adds: “The question is can you manage European equities the way they should be managed given the market environment?” Clearly, the performance of Invesco Perpetual is a compelling response for any potential client.

But not all investors are keen to throw money at volatile stockmarkets. For many, risk management and capital preservation are the watchwords. That is why Invesco is actively promoting its Luxembourg-based Invesco GT Capital Shield fund, a product which aims to protect but not guarantee 90 per cent of the invested capital.

Mr de Franssu claims: “Our Capital Shield Fund has been very successful. We are the best in terms of European cross-border gross and net sales on such a vehicle to date, among all our big competitors including the banks in France and Germany.”

Over the last 12 months, this flagship fund has garnered €700m. At least 50 per cent of the fund’s assets are invested in short-term fixed income securities and cash investments. The remainder is invested either in bonds, equities or cash using an in-house quantitative asset allocation process.

Mr de Franssu claims Invesco was among the first asset managers to offer capital-protected funds to retail investors.

Besides European equities and the Capital Shield fund, Invesco Continental Europe, which manages total assets of $18.4bn, will also be actively promoting its global balanced funds and tactical asset allocation capability in 2005, according to Mr de Franssu.

Some 23 per cent of Invesco Continental Europe’s total assets under management are in balanced funds. Sixty-two per cent of total assets is managed in equities and the remaining 15 per cent in fixed income.

Mr de Franssu forecasts that the greatest volume of new business will come from Germany and the Nordic region next year. Invesco manages a meagre $200m for Scandinavian investors. “Historically we never did anything in Scandinavia because we focused on France, Italy and Germany. As a result, we lost out to our competitors who all gained assets in the Nordic region. We will continue to focus on France, Italy and Germany. But we will try to build business in the Nordics.”

In April 2002, Invesco struck a landmark agreement with Deutsche Bank to distribute its funds, as a preferred third-party provider, through the German bank’s branch network.

Mr de Franssu says the deal, which he was personally involved in negotiating, took some nine months to materialise.

“But we wanted a slow start because of the performance issues we had at the time with some of our core London-based investment teams before Invesco Perpetual took over,” adds Mr de Franssu.

Third parties

Deutsche Bank decided, in 2003, to take on eight more third-party fund providers – ACM, Fidelity Investments, Franklin Templeton, Merrill Lynch Investment Managers, Morgan Stanley Investment Management, Schroders and UBS, and its own subsidiary, DWS.

The performance of many of these fund providers left Invesco in the shade. Mr de Franssu says: “We turned the corner around the end of last year with the help of new products such as Capital Shield, which we are selling through the Deutsche Bank network and we are coming back with our Perpetual managed products, notably the European equity product which is doing very well.”

Invesco’s goal is to reach $1bn of fund inflows through Deutsche Bank after three years and Mr de Franssu is confident that the firm is well on target.

He is not concerned about the dropping of the Invesco brand name in US. He claims that the decision had little to do with the mutual fund trading scandal and more with the fact that Amvescap had been questioning the merit of running two retail brands in the US.

He explained: “We had an investment style attached to our Invesco brand in the US which was a very aggressive high growth style when our traditional Invesco institutional business in the US is a much more low profile type of business. Therefore there was almost a competing picture as to what Invesco stood for in the US which was not always easy to manage.”

De Franssu: ‘we have paid the price, but we are coming back’