Invesco Distribution – should investors be cautious?

Kate Marshall | Mon 04 February 2019

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• An easy way to invest across a mix of shares and bonds
• The managers are currently cautious in their outlook for stock and bond markets
• Performance has been weaker than the average over five years

Our view

Invesco Distribution is a ready-made, diversified portfolio made up of shares, bonds and cash.

Paul Read and Paul Causer manage the bond portion of the fund. We rate them highly and like the fact they’re prepared to think differently from other bond investors. Ciaran Mallon manages the portion invested in shares, which is focused on the UK and can make up between 20-60% of the fund.

The fund isn’t on the Wealth 50 list of our favourite funds. We currently prefer other bond funds run by Read and Causer and think there are better ways for investors to get access to UK dividend-paying companies.

Time to be 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.

Read and Causer think this is changing. Global economic growth is moderate and support from central banks is gradually being reduced. At the same time bond yields are still low, so prices don't have much room to rise from current levels.

For these reasons the managers think it's right to be cautious. Their main aim at the moment is to pay investors a relatively attractive income, and provide some shelter if markets hit a rough patch. The fund currently yields 4.9%, though this isn't guaranteed or an indicator of future income.

Mallon is also relatively cautious about the stock market. It’s also performed well for most of the past decade. Now he thinks there aren’t many shares that can be bought at a price lower than their true growth potential. He says some pockets of value can still be found though.

How is the fund invested?

The bond portfolio is currently invested in a way that means it 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. So some investors sell bonds in search of higher returns, which could push prices down.

Part of the fund is 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.

The rest is invested in investment grade corporate bonds and high yield bonds. These offer a higher yield to compensate for the extra risk taken. The managers have focused on bonds issued by financial companies, including 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 biggest investments are in bonds issued by Barclays and Lloyds, as well as building society Nationwide.

The managers reduced the amount invested in shares (currently 32%) over the year as they've become more cautious. Mallon’s focused on companies he thinks have more predictable cash flows, which could help support a sustainable and growing dividend although nothing is guaranteed. Current investments include Experian, which provides consumer credit scores, and pharmaceutical group GlaxoSmithKline.

Performance

The fund’s performed well over the long term. It offers an attractive income and we think it has the potential to do well in future. But it hasn't performed as well as the average fund in the Mixed Investment 20-60% Shares sector over the past five years. We currently prefer other funds with the flexibility to invest across a range of assets or that aim to pay a regular income.

Please remember past performance isn’t a guide to future returns, and all investments fall as well as rise in value, so you could get back less than you invest. The managers have the flexibility to use derivatives, which can increase risk. Charges are taken from capital, which can increase the yield but reduce the potential for capital growth.

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2018

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2018

Find out more about Invesco Distribution including charges

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