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Invesco Continental European and Pan European Small Cap StrategiesWhy embedding sustainability is crucial for Mid Cap Investors

AmsterdamSeptember 2020

This marketing document is exclusively for use by Professional Clients and Financial Advisers in Netherlands. This is not for consumer use, please do not redistribute.

Erik Esselink – Fund Manager, Global & European Small and Mid Cap Equities

Introduction

Why sustainability matters more in Small and Mid Cap

How our thinking has evolved on ESG and Sustainability

Examples

Appendix

Agenda

Investment Team – Collaboration and ConsistencyLeveraging Regional knowledge to build consistent portfolios

Source: Invesco as at 31 March 2020.

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Continental Europe Stock Research UK Stock Research

European Small Cap Equity Pan European Small Cap Equity

Continental European Small Cap FundUCITS Fund50-60 StocksAUM $250 mln

Erik Esselink Portfolio Manager Global & European Small CapJames Matthews Senior Analyst European Equity

European Smaller Co’s Fund ICVC Fund50-60 StocksAUM $150 mln

Robin WestJonathan Brown

James MatthewsErik Esselink

Pan European Small Cap Equity FundUCITS Fund50-70 Stocks (40 EU) AUM $75 mln

Martin WalkerCiaran MallonJames GoldstoneTim Marshall

Stock recommendations

All market capsJeff TaylorJohn SurpliceOliver CollinJames RutlandSteve SmithJames Kariuki

All market caps

Small and Mid cap Small and Mid cap

Small Cap Asset class

Investment proposition Combining the attributes of small and mid Caps with a unique investment process

For illustrative purposes only.

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Fundamentalapproach

Repeatable process

Invesco proposition Conviction

Disciplined risk

management

ESG integration

Our Approach

Experiencedteam

Small cap proposition

Idiosyncraticcompanies

Family ownership

Faster growth

Diversificationbenefit

Under owned Huge universe

Our Mission is to build portfolios of European Small and Mid Caps that consistently outperform their benchmarks on a 3-year rolling basis driven predominantly by stock selection rather than factor risks

Investment Philosophy, our Investor DNAWe invest in European Smaller companies using a 3 pillar framework

Source: Invesco. For illustrative purposes only.

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DurableCompanies Non-Consensual

Valuation Asymmetry

Ideas come in many shapes and sizes, we are style agnostic

We invest in Durable Companies with a sustainable financial framework and competitive advantage

Value creation for all stakeholders is a key driver of long term shareholder returns

We see ESG analysis as an important part of our risk assessment of a company

Our Investment Thesis needs to be Differentiated to be valuable

We are contrarian and non-consensual by nature at the time of purchase

Our financial analysis needs to lead to significant valuation Asymmetry

We set 3 year price targets based on a number of valuation tools and based on our own assumptions

In Small Cap Equity, share prices can deviate significantly from their fundamental value providing opportunities

Why sustainability matters more in Small and Mid Cap

Per Euro invested, Small Cap investors can achieve more ‘impact’.

A $ 20 mln investment in in a $500 mln market cap company allows for proper engagement with company management.

Small and Mid Cap investors provide ‘new’ capital driving innovation and change, whereas mature Large-Caps are more often in capital return mode.

Smaller companies can give investors exposure to specific Sustainable Development Goals or ESG themes allowing targeted investment providing better alignment with overall ESG objectives.

Yet external Small Cap ESG data is poor, hence proprietary analysis is required.

Smaller Companies ESG reporting/communication is less sophisticated as world class ESG reporting is expensive.

Like in traditional investment research ESG research tends to be focused on larger companies, ESG analysis is evolving fast however but the universe of Smaller Companies is vast.

Why Sustainability matters more in Small and Mid Cap


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Smaller Companies are the key engine of growth for local communities

– 63% of employees of listed companies worldwide are employed by companies with a sub $5 bln market cap.

Smaller Companies devote a larger share of Ebitda to employees than Large-Caps

Smaller companies are on average more sustainably financed than larger companies despite growing faster

Smaller companies tend to be earlier in their life cycle and hence have fewer legacy businesses, potential stranded assets and entrenched view points

High founder/family ownership punishes Smaller companies yet this can be a material positive for long term investors

Why Sustainability matters more in Small and Mid Cap


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Source: Invesco as at 31 May 2020.

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Easier times ahead for European banks-v- political criticism of buybacks in the US

Bankregulation

Populist influences on policymaking, wages & ESG may prove expansionary and inflationary

Socio-economic disparity

Greater fairness in EC carbon policy to come leading to level playing fields for steel, cement & aluminium?

Europeanborder

tax

On the agenda in several European countries

Big Tech revenue

tax

Shorter, more local supply chains, near-shoring not offshoring, policy divergence, inflation not deflation

Deglobalisation

Pushing the burden of proof on to Big Tech

EU Anti-trust

Indispensable in meeting EU climate targets

EU Taxonomy

Post-recovery the world will changeHead winds disappearing for some, but only just starting for others

Digitalisation: “We have to push for investment and reform – and we have to strengthen our economies by focusing on our common priorities, like the European Green Deal, digitalisation and resilience,” – Von der Leyen,14th May 2020

Infrastructure investment: “The European Green Deal as the EU's recovery strategy: A massive renovation wave of our buildings and infrastructure and a more circular economy, bringing local jobs” –https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940

Taxonomy: Policy aiming to reduce the cost of equity for cleanest technology and encourage change

5G, Fibre: “Executive Vice-President, Margrethe Vestager, said: “The coronavirus crisis has demonstrated how crucial it is for citizens and businesses to be connected and to be able to interact with each other online.” –https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1025

Themes for a changing world

Source: Invesco as at 12 June 2020.

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https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940

https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1025

How our thinking has evolved on ESG and Sustainability

Investment process 1.0Financial & ESG Research working in tandem, mainly risk focused


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Financial investment process

Idea generation

Watchlist Recommendation

Fundamental Research

Portfolio construction Risk management

Optimal portfolio

ESG/SRI process

ESG Risk & Rating Assessment

Magnitude: Key issues provide focal point for fundamental research

Momentum: In depth analysis of key ESG controversies

ESG AnalysisESG Monitoring & Active Engagement

Engagement: Quarterly screening & company interaction

We believe the relationship of companies with their environment is constantly changing, ESG and Impact analysis helps us to better understand these changing risks and opportunities.

Investment process 2.0Our goal of our non financial analysis is to better understand the corporate culture and motivation, helping us to better value securities


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The difficulty lies not so much in developing new ideas as in escaping from old ones. John Maynard Keynes

Non financial Impactanalysis

Financial analysis

ESG risk analysis

Corporate culture analysis

Financial riskanalysis

Valuation analysis

Industry/Macroanalysis

Investment process 2.0Understanding the value a company adds to its surroundings, helps us understand the sustainability of shareholder value creation


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Sustainabilityof

shareholdervalue creation

Environment

Clients

Suppliers

Society

EmployeesCommunity

Value creation for all stakeholders is a key driver of long term shareholder returns (grow the pie)

Examples

Investment process: Signify ESG/Impact case studyESG and Impact are the main parts of their product value proposition


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Signify sells its LED products based on reducing energy consumptions driven by its world leading R&D. Within the company Signify has reduced its energy, Co2, waste and water usage significantly over the last 5 years.

Signify holds its suppliers to the same standards as it self and actively trains suppliers in issues like recycling and waste management. The company is not vertically integrated so its supply chain management is key.

Signify works with its clients to find the best long term solutions based on lifecycle cost of light. The company also provides clients with research and advice to improve worker productivity by using better lighting solutions.

Although employee turnover has increased, we are encouraged by employee take up of voluntary salary reduction proposal during the Covid19 crisis as a sign of company loyalty.

Signify is providing hygiene solutions through UV-C Light solutions preventing the spread of Covid 19 and has made their research available to the industry at no cost.

Signify is at the forefront of smart farming light solutions allowing more local farming at better crop yields, furthermore the company is improving traffic and citizens safety through better city lighting.

Corporate governance has improved significantly post spin-off of Royal Philips, the company has 100% independent board members. We are also encourage by the share count reduction and dividend policy.

Environment

Suppliers

Clients

Employees

Community

Society

.

Governance

ESG and Impact analysis were key parts of our durability analysis.

We saw the impact that Signify has as a key differentiator in our investment thesis.

The two combined played a decisive role in setting our price target and downside risk.

Signify is a manufacturer of LED and Connected LED lighting solutions. The company was part of Royal Philips and became an independent company in 2016. Sustainability is a core component of the corporate culture.

Appendix

Smaller Companies are the key engine of growth for local communitiesSmaller companies employ more people than larger companies


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Smaller Companies are the key engine of growth for local communitiesSmaller companies devote more of their earnings to employees while growing faster


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Over the long-term, smaller companies demonstrated greater earnings growth than larger companies

Smaller companies typically have lower levels of net debt relative to earnings

Given their more restricted access to capital, smaller companies must be better capital allocators

Why have Smaller Companies performed well historically?Over the long-term, smaller companies demonstrated greater earnings growth than larger companies.

Source: Table: JP Morgan as at 17 May 2019. Historical average since 1997 excluding Technology Bubble Years (2000-2001. For RHS only: Source: Bloomberg, consensus of analysts’ forecasts* (for next 3 forecast years 2019E, 2020E and 2021E) as at 14 May 2019. USD basis.

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MSCI Europe Small Cap MSCI Europe

MSCI Europe 3 year average annual EPS Growth Rate* (%)

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Global Net Debt to EBITDA – average since 1997*

Large Cap Companies 1.4x

Small Cap Companies 0.9x

UBS Family Owned Index

Largecaps

MidcapsSmallcaps

1%

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7%

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16%

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UBS Family-owned Index Global Midcap

Why we like co-investing with Founder/family owned businessesDespite often being seen as a negative in external ESG research

Source: Top left – MSCI ESG Research Inc., UBS. (rebased to 100) for the period 26 September 2005 to 26 September 2017. Top right – USB estimates based on the same period of time as the left hand chart. Bottom left – UBS Global Research. As at 26 September 2017. Returns image: For illustrative purposes only.

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UBS analysis indicates outperformance in absolute percentage terms of family firms since 26 September 2005…

…and this outperformance does not seem to come with a higher risk profile

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Smid-Cap Large Cap

Smaller companies are less well covered by sell side analysts

Smaller companies require more in-house research by fund managers

The result is a less efficient market with more alpha opportunities

Smaller Companies attracts less sell-side research. ESG research tends to focus on larger companies too

Source: Bloomberg, Factset, JP Morgan as at 31 May 2020. DM = Developed Markets. GEM = Global Emerging Markets.

Total Number of Analyst Recommendations - GlobalLarge versus Small/Mid Cap companies

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Global DM GEM

Number of Companies with <5 Sell Side Analysts

Smaller Companies tend to outperform over longer periods of time versus larger companiesDespite better ESG characteristics


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The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.

Invesco Continental European Small Cap Equity Fund is a small companies fund, you should be prepared to accept a higher degree of risk than a fund that invests in larger companies.

Risk warnings

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This marketing document is exclusively for use by Professional Clients and Financial Advisers in Netherlands. This is not for consumer use, please do not redistribute.

By accepting this document, you consent to communicate with us in English, unless you inform us otherwise. This document is not for consumer use, please do not redistribute.

This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. For more information on our funds, please refer to the most up to date relevant fund and share class-specific Key Investor Information Documents, the latest Annual or Interim Reports and the latest Prospectus, and constituent documents. This information is available using the contact details of the issuer and is without charge. Further information on our products is available using the contact details shown. This marketing document is not an invitation to subscribe for shares in the fund and is by way of information only, it should not be considered financial advice. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.

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Issued in Netherlands by Invesco Asset Management S.A. Dutch Branch, Vinoly Building, Claude Debussylaan 26, 1082 MD Amsterdam, The Netherlands.

Important information

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