Launched in 1999, the £132.52m Invesco Perpetual High Yield fund, managed by fixed income duo Paul Causer and Paul Read, has delivered consistent outperformance of the IMA Sterling High Yield sector across one, three, five and 10-year periods, placing it in the Investment Adviser 100 Club in 2013.
The fund, which was renamed from the Invesco Perpetual European High Yield fund in October, aims to achieve a high level of income together with capital growth over the medium to long term, utilising the team’s philosophy of active management and the use of fundamental principles to drive an unconstrained investment approach. However, as a high yield fund the Kiid risk-reward profile is towards the higher end of the spectrum at a level 5, with ongoing charges recorded at 1.44 per cent.
Explaining the investment philosophy, Mr Causer says it is “built on a belief that fixed interest markets are mostly efficient but continually present opportunities”.
He adds that by exploiting these market inefficiencies through fundamental analysis and a strong emphasis on valuation, the investment team tries to deliver long-term out-performance.
The manager describes the process behind the fund as “flexible and pragmatic”, noting that the approach is “informal, iterative, flexible and changes according to market conditions”, and is designed to be an ‘all-weather’ fund to be managed through the market cycle. Mr Causer adds: “This philosophy and approach have shaped an investment process which adheres to the core disciplines of logical thought processes, comprehensive analysis and constant re-questioning of underlying assumptions. The investment process comprises three key elements which drive portfolio construction – macroeconomic analysis, credit analysis and value assessment.”
The five-year performance of the fund has been strong, delivering a return of 133.1 per cent, against the IMA Sterling High Yield sector average of 85.84 per cent, according to FE Analytics.
Mr Causer highlights that the investment team’s macroeconomic views play an integral role in all the main portfolio decisions of the fund.
He explains: “These broad views set some important individual bond parameters, such as preferred maturities, yields, sectors and overall credit risk tolerances. The macro view and analysis also provide the foundation on which duration, yield curve and credit strategies are built.”
In recent months the portfolio has increased its allocation to high yield bonds in response to the change in the definition of the IMA Sterling High Yield sector, announced in August 2013, to require at least 80 per cent of assets to be held in bonds rated below BBB.
The manager notes: “The main drivers of absolute and relative return since inception have been our investment in financials, in particular the subordinated bank capital instruments, and our management of credit risk. We added to credit risk (in financials and other sectors) in periods of market stress in 2009 and 2011 and reduced risk as markets rallied in 2010/11 and in 2012. This reflects our approach – seeking to take risk when we believe it is attractively rewarded and to reduce risk when the reward is less attractive.”
He adds: “The high yield bond market has achieved strongly positive returns since the inception of the fund, broadly speaking. Highly accommodative monetary policy has increased demand for income-bearing assets and government and central bank support has reinforced the credit-worthiness of the financial sector. Yields have fallen considerably in the high yield market and spreads over government and investment grade corporate bond markets have tightened.”
Looking ahead, however, the manager remains cautious. “We’re not enthusiastic about the prospects for attractive returns in many areas of the bond market and think income is going to be crucial from here,” he explains. “We don’t see much value in investment grade, outside some areas of financials. High yield doesn’t seem like it can offer much capital appreciation from here. Our strategy is relatively defensive, as you’d expect, given our outlook. We have a core of well-seasoned issuers that we see as default-remote. We are taking credit risk where we still see attractive opportunities. But our marginal trade is to reduce risk.”
EXPERT VIEW
Rob Morgan, pension and investment analyst, Charles Stanley Direct:
Verdict
“Invesco Perpetual’s Paul Read and Paul Causer need little introduction, but what might be surprising to some is that they have been running this fund dedicated to the high yield space for 13 years. Since this time it has shown more volatility than the sector but superior returns. In recent years exposure to peripheral Europe and the banking sector have been themes played out across most of their mandates and this is no exception. Both were astute moves by the duo, and the fund retains a high weighting to financials as they believe the sector is becoming progressively better capitalised – an ideal scenario for bondholders. The established investment team with a great record of macro-economic calls makes this fund well worthy of consideration in the sector.”
