Fixed income investments performed well through 2014 as inflation and interest rates remained low, pushing bond yields lower and prices higher. The well-regarded Fixed Interest team at Invesco Perpetual believes these factors are now fully reflected in bond prices.
The team suggest wage growth and falling unemployment signals an improving economy, which they feel could lead central banks to increase interest rates. When rates rise, investors demand a higher return from their investments to compensate for the additional risk over holding cash. When the yield of a bond rises, the price often falls. Bonds have had a volatile start to 2015, following strong employment data from the US and signs of improvement in the euro zone economy.
The bond portion of the Invesco Perpetual Monthly Income Plus Fund is managed by Paul Causer and Paul Read and accounts for around 84% of the fund's assets. The managers are relatively cautious on the outlook for bonds. As such, around 14.3% of the fund is exposed to bonds with short maturities (the shorter the time to maturity, the less a bond is likely to be affected by changes in interest rates, or inflation) and government bonds. The managers view these holdings as near-cash as they can be sold quickly. This allows them to take advantage of future opportunities or weakness in the market. A further 5% is invested in defensive investment grade bonds.
Despite their cautious outlook, the managers are still finding value in selected areas and are currently positive on corporate bonds issued by financial companies. The resilience of the banking sector has improved substantially since the financial crisis, with more stringent controls in force to ensure stronger balance sheets. Many higher-risk bonds issued by financial companies collapsed in price during the financial crisis, causing their already attractive yields to rise. The managers felt the high yield on offer compensated for the additional risk taken and these holdings have performed well. Currently around 25% of the fund is invested in these bonds, with large positions in bonds issued by both Barclays and Lloyds. The managers can also invest in derivatives which involves additional risk.
Elsewhere, around 15% of the portfolio is invested in equities; this portion is managed by Ciaran Mallon. He seeks companies with strong balance sheets, a reliable dividend history, and solid, dependable management, investing in those which he feels are unduly undervalued by other investors. Croda, a chemical company which provides many of the active ingredients for products ranging from anti-wrinkle cream to crop pesticides, is one such example. The manager is attracted by its wide range of customers, strong balance sheet and sensible management. Importantly, there are also significant barriers to entry as businesses are unlikely to take the risk of switching providers for their most important components.
Our view on this fund
Over the past five years, performance has been strong with the fund returning 41.7% compared with 29.8%* for the IA £ Strategic Bond sector. Please remember past performance is not a guide to the future. The fund benefits from the specialty experience of both the Fixed Interest and UK Equity teams at Invesco Perpetual. However, we currently feel there are superior alternatives in the sector so the fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.
|Annual percentage growth|
| May 10 -
| May 11 -
| May 12 -
| May 13 -
| May 14 -
|Invesco Perpetual Monthly Income Plus||8.79%||-0.98%%||18.13%||5.47%||5.39%|
|IA £ Strategic Bond||4.56%||2.69%||12.14%||2.42%||5.27%|
Past performance is not a guide to future returns. Source Lipper IM * to 01/05/2015
Please note the fund's charges can be taken from capital which could increase the potential for the capital value to be eroded.