Invesco European Growth Fund’s 3rd-Quarter Commentary

Market overview

  • Developed global equity markets were flat in the third quarter amid concerns about rising inflation, supply disruptions and the economic growth rate.
  • Responding to inflation concerns, the US Federal Reserve has considered “tapering” or reducing the amount of emergency stimulus it has been adding to the economy since the pandemic began, while the Bank of England indicated willingness to raise interest rates before year end if needed. Inflation in the euro region also accelerated, but the European Central Bank considers the spike to be “largely transitory” and cautioned against raising interest rates too soon.
  • Energy stocks and energy-driven markets performed well as global shortages pushed oil and gas prices higher.

Positioning and outlook

  • We added one new holding during the quarter, France-based video game company Ubisoft Entertainment (XPAR:UBI, Financial) (0.73% of total net assets). Therewere no liquidations during the quarter; however, we trimmed several fund positions, including Ultra Electronics (LSE:ULE, Financial), Switzerland-based Kuehne + Nagel International (XSWX:KNIN, Financial) and Netherlands-based Wolters Kluwer (XAMS:WKL, Financial) (3.16%, 0.89% and 1.71% of total netassets, respectively.)
  • Regardless of the macroeconomic environment, we remain focused on applying our well-established, long-term, bottom-up Earnings, Quality, Valuation (EQV) investment process that seeks to identify attractively valued, high-quality growth companies.

Performance highlights

Contributors to performance

  • Strong stock selection in the industrials sector was the primary driver of relative outperformance. An overweight in the sector was beneficial as well. Sweden-based Lifco (OSTO:LIFCO B, Financial) and Italy-based Danieli & C. Officine Meccaniche (MIL:DAN, Financial) (2.32% of total net assets) were notable contributors during the quarter.
  • Fund holdings in the financials sector outperformed those of the benchmark sector, adding to relative return, with Russia-based Sberbank (MIC:SBER, Financial) a key contributor. The company has continued to build out its online ecosystem, which now consists of numerous companies and standalone mobile apps, while its banking business has continued to churn out profits.
  • Stock selection in the real estate sector also added to relative performance.
  • Geographically, strong stock selection in the UK added to relative return. Exposure in Russia and an overweight in Ireland were beneficial as well.
  • UK-based industrials company Ultra Electronics was the fund’s leading individual contributor. In July, the company received a takeover offer, at a premium, from aerospace and defense company Cobham (not a fund holding).

Detractors from performance

  • Stock selection and an underweight in the health care sector detracted from relative return during the quarter, with Germany-based MorphoSys (MOR, Financial) a notable detractor. An underweight in Denmark-based Novo Nordisk (NVO, Financial) also negatively affected relative results (1.45% of total net assets).
  • An underweight in the information technology sector detracted from relative return.
  • Fund holdings in communication services outperformed those of the benchmark sector, but an overweight in the weaker sector hampered relative results.
  • Geographically, stock selection in the Netherlands, Germany and Denmark detracted from relative return. An underweight in Denmark also had a negative impact on relative performance.
  • France-based communication services company Criteo (CRTO, Financial) was among the largest individual detractors. Criteo is a leader in advertising technology and has delivered robust results with solid progression in revenue and profit growth. However, the stock has been weaker due to concerns about profit margin gains in the second half of the year, the founder selling some of his holdings and a bit of profit taking after shares experienced significant price gains. We believe these issues are short-term/transitory and we anticipate adding to the fund’s position opportunistically.

Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher. Visit invesco.com/performance for the most recent month-end performance. Performance figures reflect reinvested distributions and changes in net asset value (NAV). Investment return and principal value will vary, and you may have a gain or a loss when you sell shares. No contingent deferred sales charge (CDSC) will be imposed on redemptions of Class C shares following one year from the date shares were purchased. Performance shown at NAV does not include applicable CDSC or front-end sales charges, which would have reduced the performance. The Investor Class shares have no sales charge; therefore, performance is at NAV. Class Y shares have no sales charge; therefore, performance is at NAV. Returns less than one year are cumulative; all others are annualized. Fund performance reflects any applicable fee waivers and/or expense reimbursements. Had the adviser not waived fees and/or reimbursed expenses currently or in the past, returns would have been lower. See current prospectus for more information. Index returns do not reflect any fees, expenses, or sales charges.

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