Invesco Tactical Bond: January 2022 Fund Update

Investments can go down as well as up, so there is always a risk that you will get back less than you invest. Nothing here is personal advice, if in doubt you should seek advice.

  • The managers invest flexibly, in all types of bonds, with very few constraints.
  • Invesco has a strong reputation for fixed income investing and follows a disciplined investment process
  • We believe the managers have the ability to interpret the economic situation and position the fund accordingly
  • The fund is part of our Wealth Shortlist of funds selected by our analysts for their long-term performance potential

How it fits in a wallet

The managers hope to generate income and long-term capital growth, so the fund could be part of a more conservative portfolio. However, the fund is not as income-oriented as some bond funds, so it is best viewed as a way to diversify a portfolio. Managers can invest in higher yield bonds which carry higher risk and have the option of using derivatives which, if used, also add risk.

Director

The fund is co-managed by Stuart Edwards and Julien Eberhardt who became co-managers of the fund in August 2020 and August 2021 respectively. Stuart Edwards will be the lead director. Despite their relatively short tenures with this fund, both managers have been part of Invesco’s fixed income team for more than a decade and contributed investment ideas for a number of years.

Edwards began his investment career in 1997 at Standard & Poor’s as an economist before joining Invesco in 2003 as a fixed income specialist. He specializes in the analysis of macroeconomic data and trends and has been a fund manager for 12 years.

Eberhardt began his investment career in 2005 at Moody’s as an analyst specializing in high-yielding, investment-grade corporate issuers. He then joined Invesco in 2008 as a bond credit analyst, specializing in financial analysis. He has been a fund manager for seven years.

Each co-manager has a number of other fund management responsibilities, but we believe there is appropriate overlap, applicable experience and they are supported by a strong bond team based in Henley. There is a relevant analytical crossover between some of these other responsibilities, notably with Edwards’ management of the Invesco Global bond fund. We expect Edwards to lead on the broader economic outlook and how the fund invests in that environment, while Eberhardt will contribute more to credit selection.

To treat

The managers combine their analysis of the economy and individual bonds to shape the portfolio. They can invest in all types of bonds, with very few constraints, so the fund is invested in the parts of the market that the managers believe offer the best value. They aim to protect the portfolio when forecasting difficult times by increasing exposure to cash and government bonds and seek stronger returns as new opportunities arise. This means that the fund’s performance depends on the managers’ ability to interpret the bigger picture of the economy and their ability to modify the fund’s investments based on what they see.

The managers will also adjust the fund’s sensitivity to changes in interest rates and will benefit from great geographical flexibility. In recent months, managers have added corporate bonds such as Vodafone, Enel and Telefonica to the fund. Currently, approximately 54% of its assets are invested in investment grade bonds (those with a credit rating of BBB or better), 38% in high-risk, high-yield bonds, and the majority of the remainder in cash. The fund begins 2022 in a fairly defensive position, in terms of the bonds it holds but also its short duration positioning. Managers are cautious on interest rate risk with rate hikes expected throughout the year.

Culture

The fixed income team at Invesco has a strong reputation and follows a clear and disciplined investment process, aiming to achieve the best returns for investors. Managers are incentivized based on fund performance, which we believe aligns their interests with those of investors.

Managers consider ESG factors when analyzing bonds, as they believe that over the long term, these factors can affect the creditworthiness of bond issuers. This does not mean, however, that managers will not take ESG-related risks within the portfolio, they simply need to be rewarded appropriately for the associated risks. They will also engage with company management in cases where ESG risk is material to bondholders.

Cost

This fund has an ongoing annual fee of 0.75%, but we have assured HL clients an ongoing savings of 0.19%. This means that you pay a net ongoing charge of 0.56%. The remittance from the fund is obtained in the form of a loyalty bonus, which could be subject to tax if held outside an ISA or SIPP. HL platform fees of up to 0.45% per annum also apply.

Performance

Since Stuart Edwards became co-manager of the fund in August 2020, the fund has returned 6.07%* to investors, ahead of the 4.88% gain for the strategic bond peer group. While this is an encouraging start for this fund, it should be noted that this is a short time frame to consider performance. Past performance is not indicative of the future.

Through his management of the global bond fund at Invesco, Edwards has also demonstrated his ability to add value through different facets of fixed income investing, including duration management (interest rate sensitivity), positioning on the yield curve and credit selection (individual corporate bonds).

Over the past year, the fund has outperformed the broader peer group, ending 0.56% ahead. Our analysis suggests that the fund’s credit selection and investments in subordinated financial bonds contributed to performance.

Under the leadership of former long-serving and now retired manager Paul Causer, we were delighted to see the fund’s full flexibility used with a proactive approach to increase credit exposure where attractive valuations existed. The drive to invest differently from peers will continue under Edwards and Eberhardt, so performance could also be different, which inevitably means there will be periods of underperformance.

Ultimately, we believe managers have the potential to reward those willing to take a long-term approach. However, there is no guarantee. We continue to expect the fund to lag a rising market, but believe it has the potential to hold up better when the market is falling.

Annual percentage growth
December 16 –

December 17
December 17 –

December 18
December 18 –

December 19
December 19 –

December 20
December 20 –

December 21
Invesco Tactical Bond 3.22% -1.85% 4.59% 12.93% 1.59%
IA Strategic Bond £ 5.17% -2.53% 9.28% 6.05% 1.03%

Past performance is not indicative of the future. Source: *Lipper IM as of 12/31/2021.

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Important InformationRemember that the value of investments, and any income from them, can go down as well as up, so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your situation, please seek advice. No news or research article is a personal recommendation to discuss.