Faint-hearted investors warned to steer clear of new global bank debt fund


One of the UK's most respected fund managers has launched a fund investing in the debt of European banks and other global financial institutions.

The Invesco Perpetual Global Financial Capital fund, managed by Paul Causer and Paul Read, aims to profit from the banking sector's recovery and is offered when bank bonds are at their cheapest since the depths of the credit crisis in 2008.

The fund is, at the outset, mainly invested in bonds issued by European, UK and US banks, including Lloyds, Barclays, Santander, Société Générale and Bank of America.

"The investment opportunity for the medium to longer term is compelling," says Mr Causer. "The financials sector is undergoing a long-term process of structural reform and rehabilitation. Regulatory change is strengthening the financial sector and banks are reorganising their capital structures to meet new regulatory obligations."

Darius McDermott, the managing director of Chelsea Financial Services, says the fund may be of interest for those willing to take on higher risk, and invest over the long-term. "The team behind the fund is very experienced and it is launching at a time when valuations are extremely low."

Although the fund focuses on bank debt, the bonds range in terms of their riskiness. Meera Patel, a senior analyst at financial adviser Hargreaves Lansdown, says Barclays did not receive state aid in 2008, is profitable, pays a dividend, has 10 per cent of its balance sheet in cash, and has only modest exposure to the eurozone periphery.

Ms Patel adds: "Elsewhere the managers will target banks who suffered during 2011's volatility such as Société Générale and those that, in their view, have been unjustifiably tarred by their country of residence, such as Spanish bank Santander."

But experts warn there may be worst to come for European banks. Chris Bowie, the head of credit at Ignis Asset Management, says: "In the next three to six months, bank debt could become cheaper, due to the risk of further eurozone volatility. Some of these banks also have high exposure to European sovereign debt." The rally in European bank credit over the past two weeks will not be sustainable over the year, warns Mr Bowie.

Although some advisers can see the sector's growth potential, they urge investors to consider the risks carefully. Mr McDermott says: "Single sector funds can be very risky – it certainly isn't for the faint-hearted."

Emma Dunkley is a reporter at Citywire.co.uk