Invesco Growth And Income Fund Q2 2024 Review

Key takeaways

• The fund underperformed its benchmark
  • Stock selection in the industrials and health care sectors drove the fund’s relative underperformance. Stock selection in communication services and financials added to relative performance.
• Fund activity was muted during the quarter
  • The team purchased new holdings in the financials, health care and information technology (‘IT’) sectors. These purchases were funded by a sale in health care and trimming of better performing positions.
• Value stocks significantly underperformed growth
  • Growth stocks outperformed value in the second quarter as the Russell 1000 Growth Index returned 8.33% and the Russell 1000 Value Index declined, returning -2.17%.

Manager perspective and outlook

While stocks related to Artificial Intelligence (‘AI’) continued to rally, driving several equity indexes to all-time highs, other non-AI related areas of the market declined.

Most S&P 500 (SP500, SPX) constituents beat earnings expectations, but earnings growth was concentrated, with the “Magnificent 7” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) accounting for most of the gains.

As expected, the US Federal Reserve’s June meeting produced no change to the federal funds rate. Meeting minutes suggested the committee anticipates just one rate cut in 2024 as inflation has remained higher than its 2% target. Fueled by AI enthusiasm, growth stocks outperformed value. The Russell 1000 Growth Index returned 8.33% and the Russell 1000 Value Index returned -2.17%. Within the Russell 1000 Value Index, only utilities and consumer staples posted gains, while real estate, consumer discretionary and health care had the largest declines. There is a notable valuation gap between the largest mega-cap stocks and the rest of the market, and we believe this creates an advantageous landscape for value conscious investors. We continue to focus on our fundamental work so we can move quickly to take advantage of new opportunities as they become available. Regardless of the economic environment, we seek to invest in companies with attractive valuations and strong fundamentals, qualities we believe will ultimately be reflected in those companies’ stock prices.

Portfolio positioning

Given that many equity indexes reached record highs, valuation opportunities were limited and portfolio activity was somewhat muted. We purchased new holdings in financials, health care and IT. These purchases were funded by a sale in health care and trimming of some better performing positions.

New holdings

Fidelity National Information Services (FIS): The company is a leading global provider of financial services technology solutions for financial institutions, businesses and developers. The company has lagged its peers in recent years due to numerous acquisitions that increased its debt. However, a new CEO and CFO have made efforts to right size the firm and refocus on its core banking and capital market businesses by selling a partial stake in a recent acquisition. As a result, we believe the company should be able to increase selling opportunities, grow earnings and potentially return capital to shareholders.

Microchip Technology (MCHP): The chipmaker has suffered through a demand downturn that by some estimates is worse than the one during the 2008 global financial crisis. However, management estimates the second quarter of 2024 was likely the bottom, so we anticipate an inflection soon. The company has a broad product line that is sold to a diverse set of end markets, customers and channels. Additionally, the company has been deleveraging and has committed to returning capital to shareholders. We believe it will be well positioned when the semiconductor cycle turns positive.

United Health Group (UNH): Like many managed care providers, United Health has come under pressure from rising medical costs and higher-than-expected utilization. The stock is currently undervalued based on our analysis. We view the company as a high-quality compounder with secular growth opportunities in the managed care segment. The US Presidential election may cause additional near-term uncertainty, but we believe United Health will be able to rebound once pricing and utilization issues normalize.

Eliminated Holding

Universal Health Services (UHS): We sold the position in this hospital operator because many of our original catalysts for the stock were realized and we found better risk/reward opportunities elsewhere.

At quarter end, the fund’s largest absolute exposures were in financials, industrials and health care. The largest overweights relative to the benchmark were in IT and communication services, while the largest underweights were in consumer staples and real estate.

Top issuers (% of total net assets)

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Sector breakdown (% of total net assets)

Top industries (% of total net assets)

Performance highlights

Stock selection in communication services, financials and consumer discretionary added to relative performance during the quarter; several of the fund’s largest contributors came from these sectors.

Stock selection in the industrials and health care sectors detracted from relative performance during the quarter. Selection and an underweight in consumer staples also hurt relative return as the sector was one of just two index sectors with a positive return for the quarter.

Contributors to performance

Alphabet: Google’s parent company was the fund’s top overall contributor due to strong quarterly earnings and higher revenues that beat analysts’ expectations.

Oracle (ORCL): Despite weaker-than-expected earnings, Oracle shares rose after management announced a significant increase in Oracle Cloud Infrastructure (OCI) bookings, including deals with OpenAI, Microsoft and Google.

Philip Morris International (PM): The company reported better-than-expected earnings and revenue growth, driven in part by accelerated revenues in its smoke free product line.

Bank of America: The bank reported lower net interest income, but non-interest income accelerated.

Micron Technology (MU): The chipmaker’s high bandwidth memory business continued to benefit from increased demand driven by AI- related spending.

Detractors from performance

Intel (INTC): Shares declined after the semiconductor company reduced its second quarter revenue and earnings guidance. Investors also appeared concerned about the future of its foundry business and lack of AI market share gains.

Bristol Myers Squibb (BMY): Despite a generally solid quarter, weaker-than-expected sales of the drugmaker’s anti-cancer medication Opdivo sent shares lower.

Walt Disney (DIS): The company reported a mixed quarter in which earnings exceeded analysts’ estimates, but revenues were weaker than expected. Disney also provided weaker forward guidance due to a slowdown in its theme park business.

ConocoPhillips (COP): The company announced its acquisition of Marathon Oil in May. The deal is expected to increase earnings and will increase the scale of Conoco’s production assets. However, the stock traded lower on the news.

CVS Health (CVS): Shares declined following a weak earnings report. The pharmacy operator also cut its full year earnings forecast due to rising medical costs and higher utilization in its insurance segment.

Top contributors (%)

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Top detractors (%)

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Standardized performance (%) as of June 30, 2024

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