HEAD-TO-HEAD: Invesco vs Pictet AM

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Investment process

Both the Invesco and Pictet products invest in Japanese equities and have long track records: Invesco’s fund launched in 2006 and the Pictet product in 2003.

The products are also relatively concentrated compared to their peers, with the Invesco fund investing in 40-60 companies and the Pictet fund holding 40-50 names.

However, the managers’ investment approaches are different, according to Ng. The Invesco product focuses on “high quality” companies, while the Pictet product prefers value names.

“The Invesco fund focuses on high quality stocks, no matter if they are value, growth, defensive or cyclical. So they do not have a definite investment style,” Ng said.

The Invesco fund manager, Tadao Minaguchi, monitors how companies manage free cash flow and prefers those that are able to improve operating margins. He also pays attention to a company’s “intangibles”, such as brand value, customer loyalty and management.

“The manager likes companies that have strong business franchises, which competitors find difficult to compete against,” Ng said.

The fund manager also has a long-term view.

“The fund holds stocks very long-term. It doesn’t have much of a turnover and around half of the current portfolio has been in the fund since its launch [in 2006],” he said.

Turning to the Pictet product, Ng said that its fund managers pay close attention to valuations.

“They prefer undervalued stocks, but they also look at the fundamentals and make checks on financial health.”

The Pictet fund holdings have an average price-to-earnings ratio of 10.66x, which is significantly lower than the Invesco fund’s 15.19x, according to data from Morningstar Direct. Pictet’s product is also lower than the average ratio for the large-cap Japan equities category (12.39x).

Both products have different benchmark indices. The Invesco fund uses the Topix Index as its benchmark, while the Pictet fund’s benchmark is the MSCI Japan Index. However, the difference in benchmarks is not meaningful, according to Ng.

Top 10 holdings

The two funds’ varying investment strategies have resulted in huge differences in portfolio composition.

For example, both funds have different companies in the top 10 holdings, apart from East Japan Railway, according to the fund factsheets.

Top 10 holdings

Source: Fund factsheets

What appeals to one manager clearly does not interest the other. For example, Morningstar rated Toyota Motor as “undervalued”, selling at a 12% discount, which is likely a key reason why the value-oriented Pictet managers have it as the top holding.

However, the company does not satisfy the Invesco manager’s criteria for a long-term buy-and-hold.

“The Invesco manager admits that Toyota is a big brand,” Ng said. “But at the same time, the auto-making business tends to be capital-intensive. This is not the business that the manager favours as he prefers companies that are able to have free-cash flow over the long-term.

“Also, although it has a strong brand value, other newcomers in the market, such as Tesla or Google, are building driverless cars that could be disruptive to the market. So the Invesco manager questions whether [traditional auto-manufacturers] will be able to maintain their strong brand value long-term,” Ng said.

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