Invesco Tactical Bond: February 2021 fund update

Joseph Hill | Thu 18 February 2021

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• Paul Causer is a well-regarded bond investor with over three decades of investment experience
• Invesco has a strong reputation for fixed income investing and follow a disciplined investment process
• We think the managers have the ability to interpret the economic picture and position the fund accordingly
• The fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The managers hope to provide some income and capital growth over the long term, and so the fund could form part of a more conservative portfolio. The fund isn’t as income-focused as some bond funds though, so it’s best thought of as a way to diversify a portfolio. The managers can invest in high-yield bonds which are higher risk, and have the flexibility to use derivatives which if used also add risk.

Manager

The fund is co-managed by Paul Causer, Stuart Edwards and Jack Parker. At the end of August 2020 Edwards and Parker both stepped up to become co-managers of the fund, replacing previous co-manager Paul Read. They’ve both been part of the fixed income team at Invesco for over a decade and have contributed investment ideas for a number of years.

Paul Causer is also co-head of fixed income at Invesco and is a manager we rate highly. Causer has over 37 years of investment experience and has successfully navigated through numerous investment cycles. We think the freedom offered by this fund allows him to make best use of his experience by following his conviction across the bond market. Each co-manager has a number of other fund management responsibilities but we’re satisfied that they have the support of a strong team of analysts and fund managers at Invesco.

Process

The managers combine their analysis of the economy and individual bonds to shape the portfolio. They can invest in all types of bonds, with very few constraints placed on them so the fund is invested in whichever parts of the market the managers think are offering the best value. They aim to shelter the portfolio when they see tough times ahead by increasing exposure to cash and government bonds and seek stronger returns as more opportunities become available. This means the performance of the fund relies on the managers' ability to interpret the bigger economic picture and their success in altering the fund's investments based on what they see.

The managers will also adjust the fund's sensitivity to changes in interest rates and are given a high level of geographical flexibility. The fund is invested across the fixed income spectrum including higher-risk high-yield bonds as well as government bonds and cash.

Coming into 2020 the managers positioned the fund defensively with around 31.5% either invested in government bonds or held in cash. However, when coronavirus hit markets the managers were active in taking advantage of the opportunities that were presented. In the weeks that followed the managers bought bonds issued by a range of investment grade companies (those with a credit rating of BBB or higher) who were raising money to bolster their balance sheets in light of disruption to their trading environment. These newly issued bonds from higher quality issuers were in many cases offering more attractive yields than would normally be associated with such companies, owing to the exceptional circumstances.

In the months that followed, the managers further reduced their positions in government bonds. They used the proceeds to add additional investment grade corporate bond exposure and to their high yield bond allocation, where they were able to secure more favorable terms on the seniority and security of newly issued bonds. This was in part driven by the confidence they took from the significant policy responses undertaken by monetary and fiscal authorities.

Culture

The fixed interest team at Invesco, led by Read and Causer, has a strong reputation and follows a clear and disciplined investment process, aiming to achieve the best returns for investors. The managers are incentivised based on the performance of the fund which we think aligns their interests with those of investors.

The managers consider ESG factors when analysing bonds as they believe that over the long term these factors can affect the creditworthiness of bond issuers. This doesn’t mean that the managers won’t take ESG related risks within the portfolio though, they just need to be rewarded appropriately for the associated risks. They will also engage with company management in instances where ESG risk is material for bondholders.

Cost

This fund has an ongoing annual charge of 0.75%, but we've secured HL clients an ongoing saving of 0.19%. This means you pay a net ongoing charge of 0.56%. The fund discount is achieved in the form of a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund had a tough few years prior to the most recent one, lagging behind the average fund in the strategic bond peer group. This is disappointing but we think the managers have the potential to deliver good long-term returns.

The managers had been cautious on the outlook for bonds for some time and as a result had positioned the fund defensively. This caused the fund to lag its peers as bond markets continued to perform well. The fund’s defensive positioning with a relatively high allocation to government bonds and cash did mean though that the fund performed better than its peer group average during March and April* of 2020 as markets were hit by coronavirus, though still lost money. The actions of the managers in then swapping some of these more conservative holdings for investment grade corporate bonds meant that it also performed well over the following months as markets recovered. Past performance is not a guide to the future.

We are pleased to see the managers making use of the flexibility afforded to them and being proactive in taking opportunities to increase credit exposure where compelling valuations exist. They often invest differently to other bond managers so performance can be different too which means there will be periods of underperformance. We ultimately think they have the potential to reward those who are prepared to take a long-term approach. There's no guarantees though. We continue to expect the fund to lag a rising market but think it has the potential to hold up better when the market is falling.

* Source: Lipper IM, 01/03/2020 - 30/04/2020

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2021

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