Invesco Ltd. is one of the most well-known investment firms in the country. Their operations span over 20 different countries around the world and are involved in investment management, wealth management, banking, and alternative investing. With over 8 decades of business under their belt, the Atlanta based firm has grown to include over 100 different investment solutions. Invesco agreed to pay $450 million in a settlement with the Attorneys General of New York, Colorado and the SEC. This was the result of allegations of improper trading practices. As of 2013, Invesco had $4.6 billion in annual revenue, $930 million of net income, over three quarters of a trillion dollars in assets under management, and over 6,000 individual employees. In fact, they are even traded on the New York Stock Exchange (TICKER: IVZ). Without knowing anything in particular about the firm, these general descriptions indicate a company that is valuable in terms of the solutions and services they offer. Why would you think differently?
We have made an effort over the last 17 years to uncover the real truth behind the “value” the active management community has made and help investors understand the illusion of “skill” that the actively managed mutual fund industry attempts to sell every single day of the year. Analyzing the biggest fund management companies around the world have yielded similar results, all pointing to what is becoming more and more of an empirical truth. It is extremely difficult to beat the market. So much so that attempting to beat the market is diminished to nothing other than the most sophisticated forms of gambling our world has even seen. Invesco, in terms of their fund strategies, falls victim to this same truth. We have done similar analyses for companies such as Wells Fargo, MFS Investment Management, JP Morgan, Lord Abbott, USAA, Midas Funds, Thrivent, American Funds, Fidelity Part 1, Fidelity Part 2, Oppenheimer Funds and T. Rowe Price. The results have been amazingly similar.
Our analysis begins with an examination of the costs associated with their 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 just accept a market's return, less a much lower fee, via an index fund.
The costs we examine include expense ratios, front end and deferred loads, and 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 costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost 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 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities to short term and long term capital gains distributions relatively to incurred by passively managed funds.
The table below details the hard costs as well as the turnover ratio for all 78 Invesco funds that have at least 3 years of 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 insample 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 an Invesco fund has experienced a 1.19% expense ratio, a 0.30% 12b-1 fee, and a 5.11% front-end load. These fees can have a substantial impact on an investor’s overall accumulated wealth if it is not backed by superior performance. It is important to mention that these performance figures do NOT include the the front-end load. If an investor paid the front-end load, their return is worse than the results we show here. Not all investors pay the front-end load depending on who sold the fund to the investor, if the fund is in a qualified retirement plan, etc. The average turnover ratio is 57.82%, which implies an average holding period for each individual stock or bond of just under 2 years. This also implies that Invesco, on average, makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is defintely embedded in the overall performance. 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.
The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Invesco’s “expertise.” We compare each of the 78 strategies since inception and against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found.
- 67% (52 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
- 33% (26 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
- 3.8% (3 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes
In general, we conclude that the Invesco family of funds has no expectation of producing above-average returns for their investors. The vast majority (67%) of their funds didn’t beat the average since their inception. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes. Now, let's take a look at the funds that produced a statistically significant alpha at a 95% confidence level.
The 3 funds that had a positive alpha at the 95% confidence level were:
- Asia Pacific Growth Fund (ASIAX)
- European Growth Fund (AEDAX)
- European Small Company Fund (ESMAX)
Before we get into the specifics of why we believe that this outperformance is based off of pure luck, we would just like to remind readers that based on a sample of 78 individual funds, we would expect 2 (1 in 40) to have a statistically significant alpha just by chance alone. Therefore, it is hard to decipher whether or not Invesco has displayed some skill or this is just example of random outcomes from a large sample size. To give a similar analogy, if we filled Yankee Stadium (54,251 max capacity) and gave everyone a coin to flip, just by random chance a handful of individuals might get 10 heads in a row. Are they skilled coin flippers? Of course not.
Further, it is extremely common to see bad benchmarking amongst foreign and international investment strategies. Because 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. For example, the benchmark for the Asia Pacific Growth Fund is the MSCI AC Far East Ex Japan Index. In comparison to its benchmark, the Asia Pacific Growth Fund is smaller in terms of market capitalization. Without controlling for this potential discrepancy, we may be attributing “alpha” to what is actually the “size premium” within that region of the world. Remember, over the last 88 years, smaller companies have outperformed larger companies.
A better way of controlling for these possible discrepancies is to run multiple regressions where we account for the known dimensions of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based strategies from Invesco who have been around for at least the last 10 years, we could run multiple regressions to see what their alpha looks like. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2015.
As you can see, not a single fund produced an alpha that was statistically significant at the 95% confidence level (green shaded area). This is what we would expect in a well functioning capital market.
Unfortunately, this type of statistical analysis is also limited. Our model is only as good as the data that we use as the independent variables in the regression. For example, if we were to run a regression for the Invesco New Asia Fund, we would need a market, size, and relative-price factors for International stocks mainly focused in Asia. No such database currently exists at this point. The alternative would be to try to explain its performance using stock market information from the US (more robust data set), which doesn’t make a whole lot of sense since it is two completely different samples.
So what is the bottom line? In general, Invesco has not demonstrated that their process of hiring the best analysts and managers and implementing their investment strategies is superior to anyone else. To say they apply a unique process to just 3 of their investment strategies seems very unlikely. The majority of funds offered by Invesco have failed to outperform their benchmark since inception. Of those that did by a statistically significant amount, it is similar to what we would expect by random chance alone. Among international and foreign-based investment strategies, bad benchmarking is rampant since there are not customized indexes for every type of investment strategy that exists. The existence of alpha may be the false attribution to a known factor like we displayed in the Asia Pacific Fund. In a global context, because we see a very similar trend across many major fund management complexes, general intuition would indicate that Invesco falls victim to a similar fate based on market efficiency, cost, and competition.
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.
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.
We have taken a deeper look at the performance of several other mutual fund companies and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can review by clicking any of the links below:
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About the Authors
Tom Allen
Tom Allen is an Accredited Investment Fiduciary (AIF®), Certified Cash Balance Consultant (CBC) and a Chartered Financial Analyst (CFA®) Level III Candidate. Tom received his Bachelor of Science in Management Science as well as his Bachelor of Art in Philosophy from the University of California, San Diego.
Mark Hebner - Founder, Index Fund Advisors, Inc. Â
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.