Invesco Tactical Bond: January 2022 fund update

• The managers invest flexibly, in all types of bonds, with very few constraints placed on them
• Invesco has a strong reputation for fixed income investing and follow a disciplined investment process
• We think the managers have the ability to interpret the economic picture and position the fund accordingly
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The managers hope to provide some income and capital growth over the long term, and so the fund could form part of a more conservative portfolio. The fund isn’t as income-focused as some bond funds though, so it’s best thought of as a way to diversify a portfolio. The managers can invest in high-yield bonds which are higher risk, and have the flexibility to use derivatives which if used also add risk.

Manager

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 lead manager. Despite their relatively short tenure on this fund, both managers have been part of the fixed income team at Invesco for well over a decade and have 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 specialises in the analysis of macro-economic data and trends and has been a fund manager for the last 12 years.

Eberhardt began his investment career in 2005 at Moody's as an analyst specialising in high yield and investment grade corporate issuers. He then joined Invesco in 2008 as a fixed income credit analyst, specialising in the analysis of financials. He has been a fund manager for the last seven years.

Each co-manager has a number of other fund management responsibilities, but we’re satisfied that there is appropriate overlap, applicable experience, and they have the support of a strong fixed income team based in Henley. There is relevant analytical crossover between some of these other responsibilities, most notably with Edwards’ management of the Invesco Global bond fund. We expect to see Edwards lead on wider economic views and the way the fund’s invested off the back of this, while Eberhardt will contribute more to credit selection.

Process

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 placed on them so the fund is invested in whichever parts of the market the managers think are offering the best value. They aim to shelter the portfolio when they see tough times ahead by increasing exposure to cash and government bonds and seek stronger returns as more opportunities become available. This means the performance of the fund relies on the managers' ability to interpret the bigger economic picture and their success in altering the fund's investments based on what they see.

The managers will also adjust the fund's sensitivity to changes in interest rates and are given a high level of geographical flexibility. In recent months, the managers have added the bonds of businesses like Vodafone, Enel and Telefonica to the fund. It currently has around 54% of its assets invested in investment grade bonds (those with a credit rating of BBB or above), 38% in higher risk high yield bonds and the majority of the rest in cash. The fund begins 2022 fairly defensively positioned, in terms of the bonds it holds but also its short duration positioning. The managers are cautious on interest rate risk with rate rises expected throughout the year.

Culture

The fixed interest team at Invesco has a strong reputation and follow a clear and disciplined investment process, aiming to achieve the best returns for investors. The managers are incentivised based on the performance of the fund which we think aligns their interests with those of investors.

The managers consider ESG factors when analysing bonds as they believe that over the long term these factors can affect the creditworthiness of bond issuers. This doesn’t mean that the managers won’t take ESG related risks within the portfolio though, they just need to be rewarded appropriately for the associated risks. They will also engage with company management in instances where ESG risk is material for bondholders.

Cost

This fund has an ongoing annual charge of 0.75%, but we've secured HL clients an ongoing saving of 0.19%. This means you pay a net ongoing charge of 0.56%. The fund discount is achieved in the form of a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Since Stuart Edwards became co-manager of the fund in August 2020, the fund has delivered a return of 6.07%* to investors, ahead of the 4.88% gain for the strategic bond peer group. Although this is an encouraging start on this fund, it should be noted that this is a short timeframe to consider performance over. Past performance isn’t a guide to the future.

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

Over the last year the fund has performed better than the wider peer group, finishing 0.56% ahead. Our analysis suggests that the fund’s credit selection and investments in subordinated financials bonds have contributed to performance.

Under the previous long serving and now retired manager Paul Causer we were pleased to see the full flexibility of the fund being used with a proactive approach to increasing credit exposure where compelling valuations existed. The willingness to invest differently to peers will continue under Edwards and Eberhardt so performance could be different too, which inevitably means there will be periods of underperformance.

We ultimately think the managers have the potential to reward those who are prepared to take a long-term approach. There's no guarantees though. We continue to expect the fund to lag a rising market but think it has the potential to hold up better when the market is falling.

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2021.

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