Invesco Funds Series 5 Interim Report - Invesco Global Product Range

Invesco PRC Equity FundInvestment Adviser’s Report on behalf of the ManagerOver the six months to the end of May 2014 the Fund’s “A” Sharesreturned (10.8%) (USD), compared to the benchmark MSCI China 10/40index which returned (6.8%). This placed the Fund in the third quartile of itspeer group, the GIFS China Equity sector, which returned (8.5%).Chinese equity markets were volatile over the period with an increase ininvestor risk aversion early in period due to fears of contagion from otheremerging markets such as Argentina and Turkey. Sentiment was alsoimpacted by weaker-than-expected trade and industrial production datareflecting a slowdown in China’s economy and some negative news flowsurrounding an onshore corporate bond default. While there have beensigns of stabilisation in the economy, the property sector remains a keyarea of risk with downward pressure on sales prices and transactionvolumes. On a more positive note, the National People’s Congress meetingheld in early March reinforced the government’s twin objectives:maintaining growth to ensure employment as well as pushing forward withreform.The main reason for the underperformance of the Fund relative to thebenchmark index was stock selection in the information technology sector.Notable detractors included holdings in internet companies such as anonline search result prioritization service provider and an online mediacompany. On the other hand, the Fund’s sector positioning, which is drivenby our bottom-up stock selection process, contributed positively. Inparticular, our overweight positions in the utilities and healthcare sectorsadded value as they outperformed the broader market.While the slowdown in China’s economy continues to dominate theheadlines, it is important to put the high economic base into perspective.China is going through a macro adjustment phase as it attempts totransition towards a more sustainable economic model. One way ofachieving this is through debt containment. In our view, the currentdeleveraging process is being carried out in a well-controlled and systematicmanner. Therefore it is encouraging to see that the government hasrecently stepped up regulation surrounding the sale of trust loans packagedinto wealth management products, which illustrates the commitment of theChinese government to reducing systemic risk.Meanwhile, reform on various fronts continues to gather momentum. The‘Shanghai-Hong Kong Stock Connect’ announced in April - a pilot programto connect the stock exchanges of both cities - is an important step inopening-up China’s capital markets. We believe this is a big step towardsfurther opening up the capital account, which in turn will promote theinternationalisation of Renminbi. The government has also pushed throughreform in bond and equity markets as well as promoting development inprivate equity. For example, local government now has the ability to issuebonds, which we believe will remove the current opaqueness in provincialgovernment financing. The move provides local government with anadditional financing channel; and enhances balance sheet transparency byrequiring them to obtain credit ratings. We continue to focus on potentialreform beneficiaries.Dated: 30 June 2014 – Invesco Global Asset Management LimitedWe continue to hold a high-conviction investment strategy, with a focus onstock opportunities that exhibit growth-at-a-reasonable-price (GARP).Trends that we have identified such as the rise of mass consumption,including healthcare spending, remain intact. We do not believe that recentmarket volatility signals any reversal in these trends, rather that marketconsolidation has brought the valuation of a number of our favoured stocksto a more reasonable level, and as such we will revisit them when sentimentstabilises.13 Invesco Funds Series 5