Invesco Perpetual bond fund giants Paul Causer and Paul Read have started selling some of their major bank bond holdings, after their funds soared to the top of the performance charts.
Speaking exclusively to Investment Adviser last week, Mr Causer has revealed that the duo is cutting financials “at a slow pace” following the recent rallies seen in the sector.
The move comes after the managers’ ultra-high weightings in financials has caused them to suffer severe periods of underperformance in recent years, as the global growth lull and eurozone sovereign debt crisis triggered a slump in assets perceived to be economically sensitive.
But more recently the managers’ £5.8bn Corporate Bond fund and £284m Tactical Bond fund have rocketed up the performance leagues with market rallies led by cyclical areas.
The gains have been enough to propel Invesco Corporate Bond to a 15.1 per cent gain in the past 12 months, ranking it fourth of all funds in the IMA Sterling Corporate Bond sector, according to FE Analytics.
Invesco Tactical Bond celebrated its three-year anniversary last week with a sector-beating return of 27.2 per cent thanks to the rallies, the data shows.
“The market was wary about financials but there was fantastic value,” Mr Causer said. “But now they’re some of the tightest trading instruments in the market.”
The manager conceded that the reason for the funds’ “bad performance was [holding] too much financials when it was in a tailspin”.
“I don’t think that will happen again because something profound has changed,” he added.
The manager also admitted that there were concerns about bond markets of late, following remarks made by his colleague Mr Read last October that equities looked more attractive than bonds in many areas. “Where we have got to now, it can’t continue. The arithmetic can’t make it happen,” he said, adding that there was no reason why markets should fall immediately. “I am a bit bearish, because frankly rates are so low, but I’m not going to say now it is time to completely get out of bonds,” he added.
Meanwhile, M&G Investments has denied suggestions that the recent underperformance on its giant bond funds is down to constraints arising from their massive size.
Its £5.8bn Strategic Corporate Bond and £6.4bn Corporate Bond funds, both managed by Richard Woolnough, have fallen to near the bottom of the IMA Sterling Corporate Bond sector on a one-year view.
A spokesperson for M&G said: “The reason for this underperformance is not related to fund size, rather our less aggressive position in subordinated bank bonds compared to some sector peers.”
The spokesperson added that Mr Woolnough – a former gilt fund manager in his early career – had been increasing exposure to financials during the final quarter of 2012 and start of 2013.
Mr Woolnough has steadfastly avoided subordinated bank debt – a move which has stood his funds in good stead since the onset of the financial crisis and helped them draw in more than £800m in new inflows in the past 12 months, according to FE Analytics estimates.
M&G has been attempting to slow inflows into the funds since last July as Mr Woolnough admitted it had become “more difficult to implement investment views” due to their ballooning size.
In the 12-month period to the end of January, both funds ranked in the bottom quartile of the IMA Sterling Corporate Bond sector.
The M&G Strategic Corporate Bond fund gained 11.4 per cent in 2012 while the Corporate Bond fund gained 11.3 per cent, but this lagged the sector’s average 13 per cent return. In contrast, the Invesco Perpetual Corporate Bond fund posted the third-best return in the sector in 2012, gaining 19.5 per cent.
