The Van Kampen acquisition makes the firm bigger and better.
By Ryan Leggio | 12-30-10 | 06:00 AM | Email Article

Invesco's stewardship has improved over the past few years and a recent acquisition will replace one of the firm's weakest lineups. 

 Invesco  deserves credit for improving its corporate culture so it's increasingly investor-focused. The firm, which was once known primarily for its growth equity investing, has continued to shift away from the momentum-based strategies that characterized its earlier days. Invesco also improved its fund lineup when it acquired Van Kampen, a firm known for its large and successful domestic value funds.

Ryan Leggio, Esq., is a fund analyst with Morningstar.

Many of Invesco's improvements have come during the tenure of CEO Marty Flanagan, who took the reins in August 2005. Early on, Flanagan took steps to shake up the leadership team overseeing the Houston-based office of Invesco (which was known as Invesco AIM until early 2010). He and his lieutenants deliberately assessed the strengths and weaknesses of the firm's portfolio-management personnel, a process that continues to this day. Management streamlined the firm's back-office operations, consolidated its mutual fund lineup, and began to repair its tenuous relationship with the funds' board of directors. These moves helped lay the foundation so Invesco could strengthen its investment capabilities.

Notably, several of Invesco's strategies proved relatively resilient in the 2008-09 market slide, and the firm retained all of its investment professionals during the period, even though other large firms laid off money managers and researchers. Among the shop's most solid strategies are those run by the international growth equity team, including  Invesco International Growth , under CIO Clas Olsson. Other highlights include the U.S. core equity team, which backs  Invesco Charter  and  Invesco Mid Cap Core Equity  and is under CIO Ron Sloan's team. And Meggan Walsh has done well with  Invesco Diversified Dividend .

Management's co-CIO structure has proved effective since the firm's failed search for a single CIO in late 2007 and early 2008. Invesco has five co-CIOs that head up its U.S. growth equity, U.S. core equity, U.S. value equity, international growth equity, and worldwide fixed income teams. This structure has enabled each co-CIO to take a proactive role in shaping the culture and capabilities of their respective teams, without forcing the team's varying investment styles to gel under one CIO. The strength of this structure was evident in 2008 as Sloan's risk-averse Core funds fared much better than the fully invested Value funds.

Value Funds Get Extreme Makeover
In areas where Invesco's investment lineup has been weak, it's taken steps to address specific problems. For one, it dramatically improved its value funds by buying Van Kampen in 2010 for $500 million in cash and $1 billion in equity. Van Kampen was strong where Invesco was weak: Van Kampen's two largest investment lineups, domestic value equity and municipals, were two of Invesco's smallest. Domestic value was not only one of Invesco's smallest group of funds, but also one of the weakest under U.S. value equity CIO Brett Stanley. Under Stanley, the large-value funds put up devastating losses in 2008 and early 2009.

Invesco, with the support of the funds' mutual fund board, has handled the merger well so far. The integration process has been transparent. Investment personnel at the combined organization have been broadly impacted by the deal. All told, 24 investment professionals and nine investment teams have left the firm, due mainly to overlapping capabilities.

The biggest management change related to the deal came in July 2010, when James Gilligan replaced Stanley as the U.S. value equity CIO. Gilligan, a 25-year Van Kampen veteran, served as lead portfolio manager for Van Kampen's reputable U.S. large cap relative value and U.S. mid cap value strategies for two decades. Stanley's departure was well-timed for investors: His volatile value funds, including the equity sleeve in  Basic Balanced , rebounded in 2009 and early 2010, before management duties went to Van Kampen managers. Going forward, Invesco's value strategies in the Van Kampen mold likely will be less volatile and easier to own.

Merger Mania
Invesco also proposed 57 mutual fund mergers in November 2010. The move affects roughly 37% of Invesco's funds and 21% of its mutual fund assets. If shareholders approve, the mergers will be complete sometime around the second quarter of 2011. Even before the mergers go through, Invesco's four largest retail mutual funds will be former Van Kampen funds. These mergers go a long way in consolidating Invesco's fund lineup, and the firm now has a strong presence in every major retail mutual fund category.

Invesco has done a good job explaining these changes to shareholders, which is consistent with a more-recent emphasis on making marketing and shareholder communications increasingly shareholder-friendly. Invesco recently finished integrating the Van Kampen funds into its website and plans on making the website even more shareholder-focused. Its market update articles, its commentary from Invesco CEO Phil Taylor, and its frequent interviews with portfolio managers shed greater light on the mutual funds' strategies, management, and performance. For example, U.S. growth equity CIO Juliet Ellis has written recently that some of her funds' strong returns can't continue forever--something that was lacking and much needed in shareholder communications as the firm was growing quickly more than a decade ago. Those communications should give investors a clearer idea of what to expect from the funds and how to use the funds more effectively. Meanwhile, on the sales side, the salesforce is less focused on gathering assets and pitching hot funds, which also should help investors own the funds better.

While we think Invesco is on stronger footing than it was a few years ago, there are still some areas worth watching. For instance, Invesco's large-growth offerings still lack steady, above-average performance, and external hires or subadvisors may be necessary to rectify the situation. And Invesco is still a long way from having industry-leading fixed-income portfolio-management and risk-management capabilities.

It's also worth noting that Invesco may still be in the honeymoon phase of its merger with Van Kampen. It's unclear, for example, how long Gilligan and other former Van Kampen managers will stay on and if there will be any clashes between the two cultures. Finally, while Invesco announced there would be modest fee reductions related to its fund mergers, shareholders will have to wait until at least mid-2011 to see if Invesco or the mutual fund board will be able to pass along the significant economies of scale that should come as some of the funds should double in size.

There certainly are risks to Invesco's improved corporate culture, but all told, the firm is better than it was a few years ago. Management has taken a thoughtful approach in improving its domestic value fund lineup, and many of the company's recent actions will lead to better and lasting results for fund shareholders.

Securities mentioned in this article



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Ryan Leggio does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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