Mark Dampier: Why this duo's bumpy ride with the banks can pay off
Saturday 23 June 2012
Rather than focus on one fund this week, I thought I would look at the range of bond funds managed by Paul Read and Paul Causer at Invesco Perpetual. Their views are interesting at the moment, notably with regard to banks, and are expressed across their funds with varying levels of risk.
Without doubt the banking sector has been at the eye of the storm, with eurozone debt problems continuing to mount. The recent rescue of Spanish banks is the latest example, and we are certainly not out of the woods yet given where Spanish bond yields are.
However, while many investors are steering well clear of the bonds of banks and other financial institutions, Paul Read looks at things differently. He feels an exceptional opportunity has opened up given the high yields on offer.
Mr Read believes the bond market is getting better at understanding what is going on and is therefore less panicky than it was in 2008. He also points out there is good news coming through for virtually all banks as they repay callable bonds and reduce their levels of debt. In addition, they are also reducing risk assets on their balance sheets in a widespread "rehabilitation" that Mr Read believes is transforming them into more stable institutions.
It is worth pointing out at this stage that the managers are being highly selective. There are huge differences across the banking sectors of individual countries.
Mr Read told me they are happy to include exposure to southern Mediterranean nations, and the funds' own securities issued by BBVA and Santander in Spain and Unicredit in Italy. He believes Italy has a similar debt profile to the UK, but while the focus is firmly on Europe, UK gilt yields have fallen to record lows. This highlights an important risk for all investors presently. UK government debt seems to have been given "safe-haven" status by the markets, but that may not last forever given the challenges we face. With the 10-year gilt yielding just 1.7 per cent, a capital loss of around 30 per cent could occur if yields spiked to Spanish or Italian levels.
In the Invesco Perpetual Corporate Bond Fund bank exposure represents around 40 per cent of the portfolio, which explains why it is more volatile than other corporate bond funds. It could be argued this is a higher risk approach, but Messrs Read and Causer believe the risky approach is actually to buy what might appear high-quality bonds, but with yields so small that any change in sentiment will wipe out any potential gain. In their Tactical Bond fund, which allows them more flexibility, they hold quite a bit of cash and have also shorted gilts, German bunds and US treasuries, again believing these traditionally safe areas are overpriced.
Given these contrarian views, it is important to recognise that Mr Read and Mr Causer's stable of bond funds are likely to deviate from their main rivals in both performance and volatility.
However, the more traditional Invesco Perpetual Corporate Bond Fund should be less of a bumpy ride than the more aggressive Tactical Bond Fund. For a concentrated fund specifically backing bonds of financial institutions, adventurous investors might wish to consider Invesco Perpetual Global Financial Capital.
I hope Mr Read and Mr Causer are right with their positioning. I have warned a number of managers who have been shorting the gilt market for the past year they have been too dogmatic with their views. While gilts are expensive, the Bank of England has been huge buyers through quantitative easing, plus there is ongoing demand from the pensions industry.
There is no point in standing in front of a runaway train hoping it will stop and go the other way. That said, with yields around 1.6 per cent, the downside to shorting seems limited, and Messrs' Read and Causer have built successful careers being contrarian bond managers. While they can be volatile the funds generally produce excellent, longer-term performance.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.h.l.co. uk/independent
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