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
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