What are the real underlying structural forces bewildering the RBA? Is cash the king once again? Find out more about these and other interesting topics in Pendal’s latest review of fixed interest markets.

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I have learnt over my many years of investing that there are three reasons why dividends are key for investors:

1. Dividends are an important part of the return of an equity portfolio

2. The level of dividends is not impacted by the level of the sharemarket

3. The dividend yield on stocks can act as a ‘safety net’ in times of volatility

Dividends are an important part of the return

Over the long term, returns from an equity portfolio come from 2 sources – the capital appreciation from the shares held in the portfolio as well as the dividends received.
When one analyses the returns of these two components from the Australian sharemarket (the ASX 300) over the last 20 and 40 years the results are as follows:

Source: Calculated using IRESS data indices 31 December 1979 – 30 June 2018

As can be seen from the table above around half of the returns from the Australian sharemarket in the last 20 and 40 years have come from dividends – emphasising how important the dividends received from one’s portfolios are to the total return received from that an equity portfolio over time.

As can be seen from the table above around half of the returns from the Australian sharemarket in the last 20 and 40 years have come from dividends – emphasising how important the dividends received from one’s portfolios are to the total return received from that an equity portfolio over time.

The level of dividends received are not impacted by the level of the sharemarket

While the level of capital returns from an equity portfolio over any period depends on the movement in the share prices, the level of dividends received by an investor from an equity portfolio is dependent on the performance of the underlying companies’ earnings. The level of dividends and the dividend payout ratio of any company is set by the Board of the company and is generally a reflection of the overall profitability of a company – independent of its share price.

This is an important point to remember as it means that in negative periods in the sharemarket, an investor’s level of dividends from a diversified portfolio – if made up of quality companies with the right attributes – should not vary greatly from year to year and is largely irrelevant of what is happening on the overall sharemarket.

The chart below demonstrates this by comparing the volatility of the level of capital return to the level of dividend from the ASX 300 over the last 20 years.

Chart 1: volatility of returns of capital and income of the ASX 300 over 20 years

Source: IML, S&P ASX300 31/03/1998 – 30/06/2018

As can be seen from the chart above while the level of capital returns’ volatility has been quite high over the last 20 years – not surprisingly perhaps as it contains periods such as the tech boom and bust and the GFC and Eurozone crisis – the volatility of the dividends received by an investor from the ASX 300 has been very low – depicting the steadiness of dividends and this part of an investor’s returns.

The movement in the sharemarket particularly over shorter time periods of 6 to 12 months is more often than not dictated by the mood of investors. The mood of investors is impacted by things such as the predictions for future level of economic activity, inflation and interest rates as well as perceptions of geopolitical stability.

Often with hindsight what are quite minor events from an economic standpoint can cause the mood of investors to sour markedly and lead to large declines in the sharemarket. For example, Iraq’s invasion of Kuwait in 1991 led to all sorts of gloomy predictions about an impending global recession by many market analysts and economists.

Times of a perceived crisis can cause many investors to panic, and the prices of most shares can fall heavily initially as many investors/traders reduce their overall level of sharemarket exposure by rapidly selling shares indiscriminately and independent of their quality. What I have observed over the many years of investing is that once the panic subsides and some sort of normality is restored, those companies with sustainable earnings that can support a healthy dividend stream are often the shares that recover the quickest.

The reason for this is fairly obvious – rational long-term investors are always attracted to companies that pay a healthy dividend from a sustainable earnings stream as they understand that the level of returns from dividends is not dependent on future share price performance.

In other words, once shares in quality companies fall to a level where the dividend yield is attractive, this attracts long-term investors to start buying these shares as they ‘lock in’ the attractive dividend yield, despite a volatile sharemarket.

Concluding remarks
The lesson for investors is to always remember the importance of dividends when investing in the sharemarket. Dividends provide sharemarket investors not only with a consistent part of their total return but can also act as a ‘safety net’ in down trending markets. Dividends also provide investors with a relatively stable part of returns through the delivery of real cash flow, irrespective of the sharemarket cycle.

As a bottom-up value manager, fundamentals are crucial to deciding which companies are included in IML’s portfolios – mainly the quality and transparency of the earnings, cash flow generation, gearing levels or balance sheet strength – which ultimately is what is important in the level of dividends paid by companies to investors.

While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock.


Anton Tagliaferro, Investors Mutual Limited

When it comes to investment objectives, many retirees―quite understandably―want to have their cake and eat it: they want enough income to enjoy an adequate lifestyle for their remaining years, and they want to preserve enough capital so that they have some insurance against adversity.

From an investment perspective, the key to meeting these potentially conflicting demands lies in strategies that can reduce volatility in retirees’ portfolios and produce reasonably consistent total returns that would help meet both these income and capital objectives.

Financial-market turbulence or asset-price volatility work against nearly all investors, but particularly retirees, who―because they are drawing down capital to meet expenses―are less able to recoup losses when markets recover after downturns.

Broadly speaking, low-volatility strategies fall into two categories: those that use derivatives, and those that don’t. From an investment perspective, both have their advantages and disadvantages, and some investors will naturally prefer simplicity to the complexity implied by derivatives.

But how should retirees, given their special investment objectives, weigh these strategies’ relative merits? They should consider several factors, in our view, including volatility, price and performance. Just as importantly, they should also reflect on their own behavioural biases.

Avoiding Index Volatility

Let’s look, first, at how such strategies compare in terms of general characteristics. An equity-based strategy will typically rely heavily on its manager’s stock-picking ability, which will be essential to identifying shares which have relatively low correlation to the market’s ups and downs.

This is important, because it’s a well-attested fact that a portfolio of low-volatility stocks can outperform a broad index-based portfolio over time, on a risk-adjusted basis. It’s a phenomenon commonly known as the “low-volatility paradox”.

There are several types of derivatives-based low-volatility strategies, and one question that a retiree might want to ask in assessing them is: what role, if any, does stock selection play, and does it try to take advantage of the naturally-occurring low-volatility paradox?

Perhaps surprisingly, some derivative-based strategies have little if any concern about singling out low-volatility stocks for their equity portfolios. Instead, the portfolios replicate the broad market index while a derivative overlay attempts to smooth out the inherent volatility.

This need not be a bad thing, but there are two points to bear in mind. The first is that derivatives cost money, and the cost is likely to be reflected in the management fee. How does the fee charged by the derivatives-based strategy compare to its equity-based counterparts?

The second consideration is that the Australian share market, which is small and concentrated by world standards, is inherently volatile. The financials and materials sectors, which are both volatile, make up about 33% and 18% of the S&P/ASX 300 Accumulation Index respectively.

This means that some derivative overlay strategies―for example, put or call options on the S&P/ASX 300―need to offset broad market volatility to be effective.

One of the problems with this is that market volatility can take different forms―a short, sharp fall, for example, or a slow grind downwards―and some derivatives strategies are better able to deal with specific types of volatility than others.

A retiree looking at a derivatives-based strategy, therefore, needs to understand which kind of volatility the strategy is best equipped to handle. Strategies designed to offset many kinds of volatility tend to be expensive.

By contrast, an equities-based strategy using a portfolio of carefully selected low-volatility stocks starts off by being inherently less volatile than the market.

Managing the Upside and Downside

Relative performance is another point to bear in mind. The reason that low-volatility stocks can outperform the broad market over time is that they tend to lose less in a downturn but participate―not fully, but enough―in the upturn when markets recover.

Their limited exposure to downside risk means that they have less ground to make up when markets recover. This, combined with sufficient participation in the upside, explains how they can outperform over the medium to long term.

While the limitations in upside/downside behaviour of low-volatility stocks can be regarded as natural and inherent, however, the limitations on the upside and downside potential of derivatives-based strategies are essentially artificial.

For example, some derivatives-based strategies might attempt to limit downside risk by buying put options on their underlying stocks, and seek to offset the cost of this by selling a call option on the same trade.

The purchased put option would give the manager the right to sell the underlying stock at a predetermined price if the market price of the stock fell, while the sold call option would oblige the
manager to sell the stock at a pre-determined price if the stock’s market price rose.

In other words, the potential for this strategy to participate in market upside is limited by the sale of the call option. Some derivative strategies even target the income opportunity available from selling both calls and puts, thereby limiting both their upside potential and ability to limit downside risk.

Having weighed these pros and cons from a dispassionate investment perspective, what other factors should the retiree consider?

Behavioural Considerations for Retirees

Top of the list should be the retiree’s own risk appetite and financial circumstances―in respect of which there is no substitute for professional financial advice. The issue may not be “Which strategy should I choose?”, but how best to use both kinds as a form of portfolio diversification.

Either way, there are points that both the adviser and retiree may wish to consider, in our view.

One is that retirees tend to take a lot more interest in their investments than they did when they were in the accumulation phase and preoccupied with careers and raising families. Given their likely level of financial expertise, would they prefer to monitor complex or relatively simple investments?

As a general point, equities-based low-volatility strategies tend to be simpler and more transparent than their derivatives-based equivalents, and a lot easier to understand.

The other is the fact―well recognised in the literature of retirement planning―that our cognitive abilities tend to decline after the age of 75. Financially expert or not, it’s unlikely that most retirees would want to be grappling with the minutiae of derivatives strategies during their sunset years.



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In the world of haute couture, a famous designer once quipped – “In a world full of trends, I want to remain a classic”.

At Investors Mutual we would rephrase it as: “In a world full of trends, we want to remain a true-to-label value investor”.

The past 18 months has been a challenging and at times a frustrating environment for value investors. At IML we pride ourselves on our strict adherence to the IML investment mantra which has defined our approach to investing for the past 20 years – through all market cycles. That is to buy and own companies with a competitive advantage, with recurring earnings, run by capable management, that can grow, at a reasonable price.

This can be neatly described as an investment style of Value with a strong focus on Quality. However, over the past 18 months this proven approach has significantly lagged the styles of Growth and Momentum based investing.

A quick recap of the different styles

Value investors 

Seek companies whose share prices are trading below their intrinsic value as determined by bottom-up, fundamental analysis. This may include buying companies that are trading below their tangible book value, their net asset value, that have a long history of earnings and dividends and that trade at reasonable valuations.

Growth investors 

Seek companies that exhibit above average earnings growth and often are happy to buy when the share price looks expensive or trading well ahead of reasonable fundamentals. Growth investing is an act of faith, often buying earnings which have not yet materialised or where a company is expected to continue grow at a quick pace well into the future. Traditionally these companies trade on very high PE ratios as their earnings are expected to continue to accelerate for many years into the future.

Momentum strategies

Disregards much of the fundamental analysis that Value and Growth investors utilise. Momentum investors seek to capitalise on a continuation of short term existing trends. To put it simply this style – often used by quant investors and hedge funds – buys because the share price is trending higher or sells because it is trending lower. This style includes investing in whatever current market fads or concepts are capturing investors’ imagination. This style is self-fulfilling for a time as the more people believe the hype, the more the share price incites others to jump in.

So where are we today and why has it been a challenging 18 months for a Value investor?

As can be seen from figure 1: Momentum and Growth have outperformed Value and the ASX300 by a significant margin over the last 12 months. The scale of the out performance of the last 12-18 months has been so significant that it is now impacting the 3- to 5-year comparisons.

Figure 1: Annualised returns of ASX investment styles

There are a number of dynamics at play in the current market

We are now nine years into the current market phase which has been driven by a record breaking US market and by continued record low interest rates in many parts of the world – including Australia. Since Donald Trump was elected 18 months ago the US market has risen strongly and until recently volatility was at all-time lows. This renewed and unflinching sense of confidence in the sharemarket has made it difficult for Value investors such as IML to keep pace with the sharemarket, while the environment has favoured both Growth and Momentum strategies.

The majority of companies we visit continue to indicate that conditions remain very competitive in many industries and it remains a challenging environment to grow profits. As an experienced Value manager, it makes little sense in this environment to take on additional risk and pay excessive multiples for stocks which are attractive because they are growing faster than the average company.

However, over this same period many Growth and Momentum managers have shown a willingness to pay high multiples for companies such as; Treasury Wines, Bluescope Steel, Qantas, A2 Milk, NextDC, Cochlear, Macquarie Bank, Resmed and Aristocrat. While many of these are decent companies we challenge the thesis of buying these companies on such high valuations simply because of their short-term earnings outlook. It seems to us that some of the buying is being fuelled by hopes that current macro conditions will last forever.

As an example, a major theme has been the stellar performance of companies rising on exposure to the ‘daigou’ market into China, share prices continue to be based on the expectation that they can sell ever larger amounts of their products into China without any hitches.

We continue to ask ourselves when looking at many of these companies: is too much faith being baked into the future earnings projections of these companies? It seems to us that many companies are priced to perfection and any small slip or earnings downgrade will lead to a very rapid derating in many of these companies.

As demand for these Growth companies continue, we are now seeing Momentum strategies joining in and bidding these stocks up to vastly excessive valuations. The past 12 months has resulted in a very narrow universe of growth and momentum type stocks driving the market higher, whilst good quality industrial companies with modest yet sustainable earnings have lagged.

As Value managers, it is not our style to participate in this exuberance, we have a clear valuation framework around every company in our universe and one which we have always stuck to successfully since our inception.

Resources v Industrials – another growth v value conundrum

This brings us to the topic of the significant outperformance of Resources over Industrials since February 2016, which is also a major factor contributing to IML’s portfolios recent underperformance. Resource stocks by virtue of their nature fit the designation of chasing growth. IML always takes a cautious view on Resources given their high volatility and unpredictable earnings. Resource companies’ earnings and dividends remain beholden to the movement in underlying commodity prices, which remains totally unpredictable – as clearly seen in the last few years in the wild swings we have seen in the prices of commodities such as oil and iron ore.

In January 2016 commodity prices reached decade lows (yet still above longer-term averages), beset by global oversupply, tepid economic growth and significant concern for China’s financial markets. However, the Chinese Government responded with significant amounts of stimulus which helped many commodity prices to rapidly recover and in turn to a significant rally for Resource companies.

IML has always preferred to invest clients’ monies in a diversified portfolio of good quality Industrial companies. This method of investing in quality Industrial companies allows the prudent investor such as IML to model out the earnings streams of these companies into the future with some degree of certainty. Such a diversified portfolio of good quality Industrial companies will also provide investors with a predictable income stream in the form of dividends over time.

While at times a difficult market for value investors, we remain confident in our long-term approach and point to figure 2 below highlighting the long-term performance of the Industrials and Resources sectors. It is worth highlighting that the Resources sector returns are negative on a total return basis over 10 years.

Figure 2: ASX Industrials v Resources

What are we buying and why?

We have been buying the following companies on current share price weakness, companies which we believe have very resilient earnings, and strong management teams, yet whose share prices are all being impacted by factors which, in our view, are temporary in nature. We believe these investments will serve IMLs portfolios and their investors well in the longer term.

Amcor – a resilient global packaging company which is currently under pressure due to higher input prices and uncertainty around their emerging markets businesses. Amcor generates strong cash flows and has been relatively inactive on M&A for a while now as target businesses have been excessively priced. If reasonable acquisitions don’t eventuate, the focus will return to capital management which has been a key facet of Amcor’s strategy for capital deployment in the past.

Brambles – a global pallet pooling business, currently trading on 16.5x PE, with benefits still to come from productivity increases in its US pallet business. Brambles’ share price is currently trading lower because of fears that increases in lumber and transport costs will impact margins.

Pact Group – a rigid plastic packaging company which has diversified their business into contract manufacturing and materials handling. Concerns around organic growth from recent results have weighed on the share price, however we think Pact has a very strong management team, and is a durable business which can grow earnings over time via continued cost-outs and bolt-on acquisitions.

Caltex – a leading fuel distributor in Australia with a hard-to-replicate infrastructure network across the country. The share price has been weak of late due to slower near-term earnings growth as refining margins have declined and the company transitions from a franchise model to company operated.

Transurban – a toll road operator with a quality portfolio of roads spanning Sydney, Melbourne, Brisbane and the US, currently offering investors a 5.1% dividend yield with strong growth. Transurban’s share price is currently weighed down by uncertainty surrounding the WestConnex sale process.


The last 18 months has been a difficult market to perform in for value investors such as IML. Companies caught up in the latest theme, fad or concept are being rewarded despite, at times, questionable fundamentals and often a distinct lack of sustainable earnings.

We continue to remain disciplined in continuing to focus on the fundamentals of all the companies we invest in and we seek to not over pay for companies that are often over promising and on companies where the outcome
is often far from certain. With many companies’ valuations stretched, we continue to believe that portfolios underpinned by value and quality stocks remain the best place to be.

Referencing figure 3 below, IML’s proven and successful investment approach has guided investors through volatile and challenging times, notably the tech wreck of 2001-02, the GFC in 2008 and the Eurozone debt crisis of 2011. We remain prudently positioned for any possible correction.

While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned
should not be interpreted as a recommendation to buy, sell or hold that stock. Investors Mutual Limited does not guarantee the performance of any Fund, repayment of capital or any particular rate of return. Performance returns are
calculated using the exit price, net of management fees and assuming the reinvestment of distributions. No allowance is made for tax. Past performance is not indicative of future performance. Returns can be volatile, reflecting rises and falls in the value of the underlying investments. Investors should seek independent advice as to the suitability of the Fund to their investment needs.

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We are in the business of educating our clients on the importance of retirement planning. But research has shown that a one-size-fits-all approach to communication isn’t the most effective tactic. And while it’s impossible to customise messages person by person, it turns out that it’s quite easy to customise them by one big factor: gender. It’s widely accepted that there are differing preferences in communication styles and learning techniques between most men and most women. The question is: How can you adjust your message in a way that’s enlightening, not alienating for your female participants?

The risks of not being prepared

Before I answer that question, I want to reinforce why this topic is so important. Women have longer average lifespans than men, and retire earlier, with much less Superannuation than men, yet tend to underestimate how much they need to save for retirement.

Avoiding labels

At this point, you may be thinking that I’m going to suggest a series of women-branded workshops or educational flyers stamped in pink.

But I’m not.

When Invesco Consulting began the process of creating a workshop for women, we tested numerous options for titles with specific references to women, and one of the first things we heard from women is that they do not want to be singled out by their gender. In fact, any title that included a gender reference — such as “What Women Know About Money” or “The Female Financial Advantage” — consistently scored in the bottom 20% of engagement.

Why? Because women often view these approaches as carrying a subtle suggestion of inferiority, as if the “women’s version” was created for those who don’t qualify for the regular workshop. We found that a better approach is to create educational workshops and materials with the preferences of women in mind, but which doesn’t highlight them as “special” or “different.” In other words, simply work to meet the needs of your women participants — without labeling them.

Three key principles

This is the approach Invesco Consulting took when creating our investor education workshop “Your Prosperity Picture” (notice the lack of women-specific labels in the title). We found that there are three key principles that resonate with many women investors, and we incorporated these in our program:

Principle 1: Provide experience before explanation

Principle 2: Align life goals with financial goals

Principle 3: Be positive

Principle 1: Provide experience before explanation.

According to the Public Administration & Policy – APAC Journal, 3 women tend to be “Relational Learners” while men are usually more “Independent Learners.” We found that beginning a workshop with an interactive activity (instead of just launching into a presentation) can be a great way to tap into that learning preference for many women. But what kind of activity? In a column I wrote — “What will retirement look like?” — I discussed the power of visualisation exercises. Science has shown that if you visualise a particular goal that requires financial resources, such as traveling or pursing a hobby, it helps condition the brain to look for information and resources that might help in achieving that goal. Walking investors through a visualisation exercise that focuses on their goals can be a great way to begin a financial workshop.

Principle 2: Align life goals with financial goals.

One study has shown that women who feel their financial advisors have successfully helped them align their investment goals with their life goals are 41% more likely to be satisfied. In “Your Prosperity Picture” workshops, we do this by walking investors through the process of creating a visual financial plan that illustrates their short-term and long-term goals, and organises them by the amount of financial resources that will be necessary to make those goals happen.

Once investors are talking and thinking about their vision for their retirement, the next logical step is to connect that vision with your retirement plan benefits. You’ve set the stage to talk about practical strategies geared toward making their goals happen.

Principle 3: Be positive.

I started this column with some sobering statistics about women’s retirement age and retirement superannuation balance. I did that to set the stage for you, the Financial Advisor, but I would not include these in an investor workshop. Our research has clearly shown that negative spin doesn’t sit well with most women investors, and trying to scare them into action can backfire. In fact, the principle of being positive is so powerful that it transcends gender. It’s proven to be one of the most important and consistent language trends that Invesco Consulting has seen since we began doing our language research in 2009.

What does this mean for Financial Advisors? Rather than focusing on the possibility of negative outcomes and how to avoid them, focus on achieving what’s possible. Position your retirement plan as a way to help investors reach their goals, rather than taking a gloom-and-doom approach.

Bottom line

In general, women and men have different learning styles and communication preferences, but women don’t want to be singled out. A workshop designed for these needs won’t include “women” in the title, but will follow three key principles: providing experience before explanation, aligning life goals with financial goals, and maintaining a positive message.


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