401(k) Spotlight: Invesco Select Companies Fund
Summary With a very concentrated, long-term focused portfolio, the Select Companies Fund is the furthest from an index hugger that you are likely to fund in the mutual fund industry. The fund’s managers have carried a large cash position for several years while the broader small cap universe has been relatively overvalued and is now better positioned. The recent market selloff has presented an opportunity for 401(k) investors to take a position in the fund. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of the novice and professional. Please comment if you have a question. I always try to give substantive responses. Invesco Select Companies Fund The Select Companies Fund has the following share classes: If the fund is an option in your 401(k), it will likely come in the form of the R or R5 shares. The expense ratio for the R shares is 1.45% and for the R5 shares it is .88%. For the purposes of this article, I will assume the A shares are being discussed since that share class holds most of the fund’s assets. Some readers may own the fund outside of a company retirement plan. The expense ratio of the A shares is 1.20%. The fund is best classified as a small capitalization (“cap”) blend or core fund. The weighted median market cap of the fund’s holdings is right around $2 billion. Fund Strategy The strategy of the fund is simply “beautiful” from my perspective. Invesco states it as follows: A high-conviction, long-term investment strategy in which managers view themselves as business people buying businesses and consider the purchase of a stock the same as the purchase of an ownership interest in a business. The actions of the fund’s managers speak louder than these words. As of June 30, 2015, the fund had only 25 holdings. Also, the fund only turned over 10% of its holdings during its 2014 fiscal year. This fund strays from the index like Jonah from Nineveh. I love it. It is difficult to find a fund with such a concentrated portfolio in mutual fund land. It gets even better … As of August 31, 2015 the fund had 17% of its portfolio in cash. This was not a one time event either. 19% of the fund was in cash on June 30, 2015 and 23% was in cash on June 30, 2014. The small cap universe has been relatively overvalued for quite a while. It is good to see that the fund’s managers are not just indiscriminately throwing money into stocks. They are obviously waiting for the right opportunities. This is not surprising given that the Russell 2000 index has been trading at a forward P/E (price to earnings per share) multiple of over 20 for a few years now. As of June 30, 2015 the fund’s forward P/E was only 15.37 versus 24.91 for the Russell 2000 index. Performance Sometimes a simple chart speaks volumes. Here is one that shows the outperformance of the fund over the long-term: ATIAX Total Return Price data by YCharts Over the last ten years (as of August 31, 2015) the fund has returned 7.95% versus the index’s 7.12%. Over the last several years the fund has lagged the index, but this comes with the territory when management is not afraid to carry a sizeable cash position and make concentrated long-term bets. The following chart compares to the fund to the index over the last year: ATIAX Total Return Price data by YCharts Attractive Top Holdings The fund’s third largest holding, MicroSemi Corp. (NASDAQ: MSCC ) could benefit from a broader rebound in semiconductor stocks. It was recommended by Scott Black early this year during the Barron’s roundtable . One of the fund’s largest holdings, John Wiley & Sons (NYSE: JW.A ), was included in a recent analysis I conducted on stocks in the information solutions industry. It came up as attractively valued compared to most of its peers and sports an 8% free cash flow yield. Conclusion: Attractive Entry Point The recent pullback in the broader equity markets has presented a buying opportunity across the board for U.S. stocks. I was out of U.S. stocks for months in client 401(k)s (excluding energy funds) but recently started buying aggressively during this false panic. When a solid mutual fund has demonstrated long-term outperformance, but lagged in the near term, it often presents investors with a buying opportunity. I think this is the case now with the Select Companies Fund. The fund had a relatively low P/E multiple months before the recent selloff and is likely deep in value territory now compared to its peers. Furthermore, the fund’s sizeable cash position gives the managers the ability to add to positions in the current environment, setting them up for future outperformance. After conducting this analysis, I bought shares of the fund today for a client in her 401(k). Investors with the Select Companies Fund in their 401(k) may want to consider including it as part of a broader allocation to U.S. stocks. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser.