Invesco Perpetual Tactical Bond - should bond investors be cautious?

Kate Marshall | Thu 26 July 2018

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• A fund run by two experienced bond investors
• The managers have invested the fund to reflect their cautious view
• This could help if bond markets stumble

Our View

We like Strategic Bond funds because of their flexibility.

Managers of these funds can increase risk with the aim of achieving higher returns when they think they'll be rewarded for doing so.

But they can also try to provide some shelter when their view of the world is less certain, or when there are fewer opportunities on offer. To do this they can invest in all areas of the bond markets.

They won't get it right all the time though.

Paul Read and Paul Causer, managers of Invesco Perpetual Tactical Bond have been cautious in their outlook for bond markets for several years. But this hasn't yet been the right call.

We think the managers will do a good job for investors over the long run. They have lots of experience investing in bonds and the fund is on the Wealth 150+ list of our favourite funds. The managers are currently cautious, but their flexible approach lets them make the call over when to take more risk in search of returns, and when to shelter the portfolio if they see tough times ahead.

Why are the managers so cautious?

We've lived in a low interest rate, low inflation world for a number of years. When combined with support from the world's central banks, this has helped bond markets perform well for several years. And as bond prices have risen, yields have fallen.

Paul Read and Paul Causer think this is changing. Global economic growth is showing signs of strength, inflation expectations are picking up, and support from central banks is gradually being reduced. At the same time, bond yields are very low, so prices don't have much room to rise from current levels.

For these reasons the managers still think it's right to be cautious. Their main aim at the moment is to offer some shelter if bond markets go through a tough time. In the meantime the fund offers a relatively attractive yield of 3.4%, though this isn't guaranteed or an indicator of future income.

How is the fund invested?

The fund is currently invested in a way that means its performance shouldn't be affected too much if interest rates rise. Rising interest rates are generally bad for bonds, partly because it makes the income paid look less attractive. This means some investors sell bonds in search of higher returns, which could push prices down.

Around half the fund remains invested in government bonds, short-term bonds and cash. Government bonds are deemed to be relatively safe, because there's less chance of a country going bust than a company. This means they might hold up better than bonds issued by companies when markets fall.

Government bonds are also quite quick to buy and sell. This is useful for when the managers want to sell them to invest in better opportunities.

They've also found a number of opportunities in bonds issued by financial companies, particularly banks. They think banks are in a much stronger position than they used to be, and they should be able to continue to repay bond holders. Some of the fund's biggest investments are in bonds issued by Societe Generale, Lloyds, Barclays and RBS.

How has the fund performed?

The fund has been slightly weaker than the average fund in the IA £ Strategic Bond sector in recent years. This is disappointing but we think the managers have the potential to deliver good long-term returns and the fund still has a place as part of a diversified bond portfolio. The flexible approach means the managers can invest in higher-risk areas, such as high yield bonds and emerging market debt, and use higher-risk instruments such as derivatives.

Invesco Perpetual Tactical Bond - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 30/06/2018.

Past performance is not a guide to the future. Source: Lipper IM to 30/06/2018.

Please read the Key Features/ Key Investor Information in addition to the information above.

Find out more about this fund including charges