The Analyst: Fixed interest gets interesting again
Saturday 16 February 2008
Readers of this column get a bonus this week, as I will be talking about two funds. The reason is that I think there is an opportunity in both funds, but investors the most suitable one will depend on your risk appetite and investment goals.
The funds are Invesco Perpetual Corporate Bond and Invesco Perpetual Monthly Income Plus. Both are managed by the dynamic duo of Paul Read and Paul Causer. Between them, they manage more than £5.5bn of fixed-interest (bonds) funds, but they don't get as much limelight as they perhaps deserve. Partly, this is because bonds are perceived as being dull, and also because the Invesco Perpetual brand has become synonymous with Neil Woodford, who manages almost £20bn of UK equities.
I met Paul Causer recently at Invesco Perpetual's headquarters in Henley. Being based outside the City of London has never hurt their investment performance; in fact, being removed from the short-term noise of the Square Mile arguably helps Invesco Perpetual's managers keep the fundamentals of their investments in perspective.
I found Mr Causer in excitable mood, which is not the natural state of a bond fund manager. As a group, they are known for being rather staid fellows, but Mr Causer was positively ebullient. The reason was that he can see good value in fixed interest across a broad spectrum for the first time since about 2002. Over the last two or three years, fund managers have been seeking refuge as much as possible in government gilts or short-term cash instruments; indeed, in anything where they felt absolutely confident that they would get their money back. As a result, their recent investment performance has looked pedestrian.
When Messrs Read and Causer start shouting from the rooftops, investors would be well advised to listen. They don't do it very often. The last time was in 2002 when they saw a fantastic opportunity in European high-yield bonds, which at the time yielded almost 14 per cent.
Over the previous three years, they have been able to see little value in most bond markets. Yields had fallen to very low levels. This has now gone into total reverse and yields now look extremely attractive.
The Monthly Income Plus Fund, for example, has seen its yield go from under 6 per cent to almost 7 per cent, and I wouldn't be surprised to see it hit 8 per cent this year. There are many forced sellers in the market, which means there are some superb bargains out there for shrewd investors looking to pick up undervalued bonds.
In addition, there are no new high-yield bonds being issued, and indeed very little in the higher quality investment grade universe. Even straightforward corporate bonds are now offering a really good yield over government bonds.
The high-yield markets are now anticipating a large number of bond defaults, but Mr Causer doesn't believe that the fundamental strength of these bonds has deteriorated to a level that justifies such high yields. In other words, he thinks that the reward on offer in relation to the amount of risk he has to take is the most attractive it has been for many years. This market is all about turmoil and, as you can imagine, opportunities and anomalies abound.
So where should investors place their money? If you want the less risky option, you might consider the Invesco Perpetual Corporate Bond Fund (currently yielding 4.9 per cent), which has a large amount invested in higher-quality bonds.
However, when I asked Mr Causer for his favourite fund, he highlighted Monthly Income Plus, which gives him more latitude to invest across the bond spectrum. It does have some equity content, too, which will clearly be more volatile, but as this is run by Neil Woodford I see no reason why investors should be concerned by that.
For those who want to add more equities into the mix, the Invesco Perpetual Distribution Fund could be just the ticket. It typically invests 60 per cent in bonds and 40 per cent in shares – and once again Paul Read, Paul Causer and Neil Woodford are calling the shots.
In my view, UK interest rates are far more likely to fall than to rise over the next year. Mr Causer was at pains to point out that the opportunities in bond markets are less an interest-rate story than a credit one. The huge market falls have seen the cost of debt increase sharply. In that environment, the Invesco Perpetual Corporate Bond and Monthly Income Plus Funds look a good place for investors to park some of their money while the fallout continues in the share markets.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent
Compare with the Independent: See how much you could save by switching credit cards. Compare now
- 1 International Women's Day 2014: The shocking statistics that show why it is still so important
- 2 Orgasm machine to deliver climax at the push of a button
- 3 Singapore sting: Sky-high prices are pushing locals to the edge of affordability
- 4 Liam Neeson turned down James Bond role because late wife Natasha Richardson said she wouldn't marry him if he took it
- 5 Dead woman's body found sitting in a car after six years after direct debits ran $54,000 bank account dry
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
Ukraine crisis: Russia dismisses '3am ultimatum' as 'total nonsense'
If you're horrified by a flame-roasted dog, you should be shocked at a hog roast
Poor 'live like animals' says Boris's privately educated sister after going on 'poverty safari'
White people become less racist just by moving to more diverse areas, study finds
Exclusive: Impact of immigrants on British workers ‘negligible’
iJobs Money & Business
£12000 per annum: Inspiring Interns: The company works with Tier 1 FTSE 100 Ba...
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£37000 - £40000 per annum + £20000 benefits package: Pro-Recruitment Group: **...
£30000 - £35000 per annum + generous benefits: Pro-Recruitment Group: Mixed Ta...
Day In a Page
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew