New kid on the block delivers for investors
At the end of 2011, although Invesco Perpetual bond giants Paul Read and Paul Causer had achieved peer group-beating results in their flagship Corporate Bond fund over the financial crisis, investments in financial debt had dragged down performance in the preceding 12 months.
In a reflection of their conviction in financial debt, however, the duo launched a Global Financial Capital fund in January, taking in money and delivering solid returns in spite of ongoing risks in the financial system, particularly over the eurozone crisis.
The fund, which launched into a difficult marketplace on January 25, invests in bonds issued by banks and global financial institutions and offers investors a combination of income and capital growth. Managers Paul Read and Paul Causer, alongside Invesco Perpetual’s chief investment officer Nick Mustoe, can also invest up to 40 per cent of the portfolio in financial equities.
The global financial crisis has caused extensive reputational damage to banks and financial institutions, even those where the negative view might not have been warranted. But with many using the past few years as an opportunity to reduce their costs and debts, Paul Causer and Paul Read see attractive investments within the financial services sector.
Unlike other funds in the sector, the fund predominantly invests in fixed income, with just 0-5 per cent in equities at launch. It focuses on what the managers claim are “the best-capitalised banks”, which includes many “national champion institutions” such as Lloyds, Credit Suisse, BNP Paribas and Citigroup. These banks, Mr Read says, have all made “real headway over the past few years in raising their core capital levels and strengthening their balance sheets”.
In terms of the capital structure, the managers have focused on subordinated capital, especially Tier 1 debt - capital that the bank has on its balance sheet to support the lending and trading risks it takes.
In spite of the sector exhibiting strong performance, Mr Read says yields remain attractive. “We hold a Lloyds Enhanced Capital Note that has risen in price from 110p at the beginning of the year to 131p now. Its yield has fallen more than 260 basis points in that time, but it remains attractive in our opinion, at 10.9 per cent.”
The team also holds some opportunities in peripheral European names that it thinks is attractive. An example of this is Intesa, which Mr Read says, like other peripherals (and issuers with exposure to the eurozone periphery), has seen some volatility but exhibited strong returns.
Since launch on January 25 2012, the fund’s size has risen from just £2m to £29m, through a combination of inflows and market returns. The fund has outperformed its IMA Specialist sector peer group since launch, returning 26.4 per cent, compared with 0.66 per cent from the sector.