To many investors, Atlanta-based Invesco Ltd. is an investment management conglomerate with a history of acquisitions and multi-asset platforms that spans the globe. With more than $1.18 trillion in assets under management,1 it's involved in everything from mutual funds and exchange-traded funds to private placements, separately managed accounts, variable insurance funds and a myriad of alternative investment strategies.
Indeed, this firm's history traces its roots to banking. It has also been active in growing through acquistions of other major fund competitors such as the former AIM Investments (1997) and one of the largest players in exchange-traded funds, PowerShares (2006). In May of 2019, it completed the acquisition of OppenheimerFunds, which added $224.4 billion in assets under management.
With 8,000-plus employees in 25 countries, Invesco ranks as the seventh-largest U.S. retail asset manager, according to Morningstar. (The independent funds research firm estimates that Invesco is the 13th biggest global asset manager.) The company's stock trades on the New York Stock Exchange (TICKER: IVZ).
Without knowing anything in particular about the firm, these general descriptions indicate a company that's valuable in terms of the solutions and services it offers. Why would you think differently?
One major red flag is how investors have voted with their feet, so to speak. In the 12 months through September 2019, Invesco's mutual funds had $54 billion of net outflow, per Morningstar data. The Financial Times reported such negative investment represented the biggest mass exodus over that timeframe in the industry. Its outflow during this 12-month period handily topped the "next worst-selling managers," the FT noted -- Natixis of France ($40 billion) and Franklin Templeton of the U.S. ($32 billion).2
In fact, the FT's article pointed out that Invesco's open-end mutual funds and money market funds through Q3 2019 had generated net outflow in 16 of the past 20 financial quarters.
Besides such negative headwinds, Invesco's bleeding of assets comes amid a growing body of independent third-party research calling into question the wisdom of trying to actively identify mispriced securities in relatively concentrated portfolios. This evidence is building on decades of work by top-drawer academics ranging from Nobel Laureates Eugene Fama and Harry Markowitz to William Sharpe and Myron Scholes, to name just a few.
At the same time, we've been undertaking our own studies to dig into the historical performance of active management. In this installment of IFA's ongoing Deeper Look series, we're putting under our microscope the investment strategies run by Invesco's mutual fund managers. (We've also analyzed this company's RAFI family of alternative ETFs, which is named after index methodologies developed by Rob Arnott's Research Affiliates -- commonly known by its RAFI acronym. You can click here to find our Deeper Look on this part of the Invesco lineup.)
Along with independent analysis by leading academics, our own research leads IFA's investment committee to an overarching conclusion about stock and bond jockeys: On the whole, active fund managers have failed to deliver on the value proposition they profess, which is to reliably outperform a risk-comparable benchmark.
Controlling for Survivorship Bias
It's important for investors to understand the idea of survivorship bias. While there are 132 strategies that are currently offered by Invesco, it doesn't necessarily mean that these are the only strategies that this company has ever managed. In fact, there are 139 funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly.
Fees & Expenses
Let's first examine the costs associated with Invesco's surviving 132 strategies. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.
The costs we examine include expense ratios, front end (A), deferred (B) and level (C) loads, as well as 12b-1 fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.
Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.
We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.
The table below details the hard costs as well as the turnover ratio for all 132 surviving active funds offered by Invesco that have at least five years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).
On average, an investor who utilized a surviving active equity mutual fund strategy from Invesco experienced a 1.18% expense ratio. Similarly, an investor who utilized a bond strategy from Invesco experienced a 0.92% expense ratio.
These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for equity and bond strategies from Invesco were 42.61% and 62.13%, respectively. This implies an average holding period of about 28.17 to 19.32 months.
In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.
Performance Analysis
The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Invesco's implementation of active management. We compare each of its 271 strategies, which includes both current funds and funds no longer in existence, against current Morningstar-assigned benchmarks to see just how well each has delivered on any perceived value proposition.
We have included alpha charts for each of Invesco's current strategies at the bottom of this article. Here is what we found:
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78.22% (212 of 271 funds) have underperformed their respective benchmarks or did not survive the period since inception.
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21.78% (59 of 271 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.
Here's the real kicker, however:
- 1.48% (4 of 271 funds) have outperformed their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance will persist as opposed to being based on random outcomes.
As a result, this study shows that a majority of funds offered by Invesco have not outperformed Morningstar-assigned benchmarks. The inclusion of statistical significance is key to this exercise as it indicates which result is the most likely versus random-chance outcomes.
Regression Analysis
How we define or choose a benchmark is extremely important. If we relied solely on commercial indexes assigned by Morningstar, then we may form a false conclusion that Invesco has the "secret sauce" as active managers.
Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.
A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (betas) of expected return in the U.S. (i.e., market, size, relative price, etc.).
For example, if we were to look at all of the U.S.-based strategies from Invesco that've been around for the past 10 years, we could run multiple regressions to see what each fund's alpha looks like once we control for the multiple betas that are being systematically priced into the overall market.
The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2018. Screening criteria includes funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.
As shown above, although one mutual fund had a positive excess return over the stated benchmarks, none of the equity funds reviewed produced a statistically significant level of alpha, based on a t-stat of 2.0 or greater. (For a review of how to calculate a fund's t-stat, see the section of this study that follows the individual Invesco alpha charts.)
Why is this important? It means that if we wanted to simply replicate the factor risk exposures to these Invesco funds with indexes of the factors, we could blend the indexes and capture similar returns.
To get similar risks and returns in a mutual fund would require the additional fees of those passively managed funds. That would alter such an analysis, but not by much because of the relatively low fees of the passively managed funds compared to the actively managed funds.
Given the lower costs associated with index funds, we could have more confidence that we will experience a more desirable result compared to more expensive actively managed funds.
Conclusion
Like many of the other largest financial institutions, a deep analysis into the performance of Invesco has yielded a not so surprising result: active management is likely to fail many investors. We believe this is due to market efficiency, costs and increased competition in the financial services sector.
As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold and rebalance a globally diversified portfolio of index funds.
Below are the individual alpha charts for the existing Invesco actively managed mutual funds that have five years or more of a track record.
Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.
Footnotes:
1.) Invesco, Third Quarter 2019 earnings report for the three months ended Sept. 30, 2019.
2.) The Financial Times, "Invesco bleeds $1bn a week as it tops worst-selling league table," Nov. 10, 2019.
This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.
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About the Author
Murray Coleman - Investment Writer - Index Fund Advisors
Murray is an investment writer at Index Fund Advisors. Prior to joining IFA, he worked as a funds reporter for The Wall Street Journal, The Financial Times, Barron's and MarketWatch.