In a slow-growth environment, Matthew Dennis, senior portfolio manager at Invesco Ltd., is finding opportunities in consumer-discretionary and information-technology stocks. "We've been pushed there," says Dennis, "because these are businesses that may have less stability but they may have more powerful growth dynamics and still just as healthy returns."
Dennis, based in Austin, Texas, with Invesco's international and global growth team, leads the Invesco Global Growth Class mandate. The consumer-discretionary and information-technology sectors currently account for approximately 46% of the fund.
The team's investment process is based on "EQV" -- earnings, quality and valuation -- to identify attractive growth companies. "The beauty of the EQV framework is that it is able to adapt and tilt in any economic environment," says Dennis. "It's not a top-down assessment, and we intentionally look away from a benchmark."
Holdings must meet what Dennis describes as "the holy grail" of investment criteria. These are businesses that have the ability to compound wealth over time, with a strong focus on cash flow over three years or more.
Among the fund's larger holdings is the technology giant 
Apple Inc. (AAPL). "They've hit a sort of air pocket, with sales going down," says Dennis, "but we still think Apple ticks all our boxes."
He says Apple demonstrates exceptional brand equity that resonates with consumers. As well, the Invesco team likes Apple's built-in network effect created within households that own multiple products, such as an iPhone and an iPad tablet. This makes the platform even more attractive to developers and content providers. "Apple continues to offer compelling profitability relative to the vast majority of businesses out there," says Dennis, "either in or outside of tech or consumer discretionary."
Another favourite is Alphabet Inc. (GOOGL), formerly named Google. "When I look at Alphabet through the EQV lens," says Dennis, "this is what I see. With respect to earnings, in the past five years revenues have grown from roughly US$29 billion to roughly US$75 billion, and they continue to take market share in this rapidly changing, digital advertising space."
From a quality standpoint, says Dennis, Apple has a management team with a proven historical track record of building brand equity through the consumer experience. On valuation, Apple continues "to offer close to a 5% free-cash-flow yield, and that's for a business that's still expected to compound value per share in the upper mid-teens."
Though Apple and Alphabet are primarily tech names, both are really tech/consumer hybrids, Dennis says. An example of a pure consumer discretionary holding that the fund holds is Priceline Group Inc. (PCLN). "We think that Priceline is the best positioned player in the structural growth area that is online travel and travel experience," he says. "Booking.com, their bread and butter, has double-digit industry bookings growth. That growth is expected to continue as the online travel-bookings trend takes share from offline bookings. Their scale drives traffic, the virtuous circle, which drives higher advertising revenues."
As for quality, Dennis says Priceline has an unlevered balance sheet and the ability to pay off its net debt." On valuation, "I'd like to have it cheaper," he adds, "but it's not unreasonable when you're thinking about the margins and returns on cash that this business generates."
Dennis favours companies that are global market leaders, as UK-based Compass Group PLC is in contract food and support services. "If you're at the Air Canada Centre in Toronto, watching a hockey game, and you go to buy a hot dog or get a drink, you're likely being served by a Compass employee," says Dennis. Revenues are consistently growing, they have a management team, "who gets it," and the company has pricing power. "This is the type of business, when things get difficult we ask why we're not buying more instead of should we exit."
Market sectors where growth opportunities are scarce include consumer staples, says Dennis, and to a lesser extent health care. The team has reduced some of its long-term positions in these sector that no longer meet the investment criteria.
Emerging markets do not necessarily play a significant role because the opportunity set is still limited, says Dennis. Corporate governance, as well as liquidity, can be significant issues, he said. Also, many businesses in emerging markets don't meet the Invesco team's growth criteria, such as commodity and industrial-oriented companies with high capital intensity.
"A lot of our clients ask, what do we think about the macro environment," says Dennis, "and we even frame that in an EQV perspective. One of the areas we focus on is the debt level. The poster children for that are clearly among the industrial and commodity sectors, where capital intensity and supply remain too high relative to demand."
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