Fund in focus: Invesco Corporate Bond

Posted by Liz Rees in Fund and industry updates category on 14 May 20


The proposition

The fund’s objective is to produce income and capital growth over the medium to long-term (3- 5 years). The strategy is flexible with no constraints on sector or geographic exposures.

At least 80% of its assets are invested in high quality investment grade corporate bonds. Up to 20% may be in high yield bonds to boost income.

Experienced co-managers, Paul Causer and Michael Matthews, are supported by a well-resourced team of bond analysts.

Investment philosophy & process

The managers believe it is possible to exploit pricing inefficiencies with in-depth analysis of bond valuations. They find opportunities when prices temporarily deviate from their assessment of fundamental value, such as occurred after the sell-off in March.

The team’s economic views guide portfolio positioning and forecasting the direction of interest rates is particularly important. A cautious approach means the fund has relatively low interest rate risk.

Stock selection is research-driven and the managers carefully assess potential risk versus potential return. That said it is a high conviction strategy, with a focus on sectors they believe offer best value. 

Important criteria when analysing bonds are the issuing company’s ability to generate cash, the amount of debt it has and its cost of capital. Valuation is considered in both in absolute terms and relative to cash, government bonds and other corporate bonds.

Positioning

As bond yields fell through 2019, the managers reduced risk in the portfolio. Exposure to corporate high yield was cut from 5% to just 1% and to subordinated (or unsecured) financials from 27% to 20%.

As a result, the fund started 2020 positioned defensively with 16.4% in liquid assets such as cash, high quality government bonds and short-dated instruments. The managers continued to reduce risk in January and early February.

Following a widespread sell-off in March, this liquidity was reduced to 9.8% by the end of the month as the managers bought into a number of new and existing high quality corporate bonds, enabling them to lock in attractive yields.

The new issue market has been buoyant and issues hugely oversubscribed, including bonds from Barclays, Shell and Tesco. High demand means it can be hard to get large allocations from the best opportunities but the managers will not compromise on quality and have not added to high yield bonds.

The highest exposure is still to subordinated financials (both banks and insurers). The fund also holds some exposure to US dollar denominated corporates.

Performance & Costs

Performance can lag during strong bull markets, due to defensive positioning, but the process tends to protect capital when bond prices are falling.

Since Paul Causer took control on 24 July 1995 the fund has delivered an annualised return of 6.3% compared with 5.2% for the IA Sterling Corporate Bond peer group.1

The Ongoing Charges Figure (OCF) is 0.55%, slightly above the median for the IA Sterling Corporate Bond sector, which we consider to be reasonable for the services of an experienced team.

Current outlook

The managers believe quality corporate bond valuations look attractive relative to government bonds. Ongoing Central Bank buying of this asset class should continue to underpin performance.

Central Banks are likely to keep interest rates low given the large amounts of debt they will need to issue. The managers believe the partial recovery from the bond sell-off in March is justified although they expect further downgrades and defaults so careful bond selection is key.  

The sector is home to large quality companies which are seizing the chance to issue new bonds to strengthen their balance sheet. The managers believe this offers an attractive combination of risk, reward and diversification. 

They are more cautious about the high yield sector and the lower quality investment-grade bonds (which could be downgraded to high yield) and have not been increasing exposure here. Default and liquidity risks are higher but distressed selling may present some opportunities.

Our view

The fund has a proven track record of delivering steady income from high quality bonds, with the potential for some capital upside over the long term. Interest on bond coupons are contractual unlike dividends which are discretionary.

Invesco Corporate Bond may not offer the highest yield in the sector but this reflects the focus on quality and it has a good record of preserving capital in falling markets.

We think this fund has demonstrated that its ‘safety-first’ approach can deliver attractive returns and the highly regarded team warrant the rare gold rating from Morningstar.

1 Source: FE Analytics total return in local currency, at 30th April 2020