Invesco Tactical Bond: January 2023 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 follows 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 took over running the fund in August 2020 and August 2021 respectively. 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 13 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 eight 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. Edwards leads on formulating wider economic views and the way the fund’s invested off the back of this, while Eberhardt contributes 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 to investment grade corporate bonds (those with a credit rating of BBB or above). This included investing in new issues from household names McDonald’s, Nestle and John Deere. They currently view this as the most attractive area of the market. They have also increased exposure to emerging market debt, with around 7% of the fund invested in these bonds. During 2022 they have added a position in Brazilian government debt and increased holdings in South African and Mexican debt too. They have sold high yield corporate bonds and lower rated bank bonds in order to make room for these increases. Duration has also been meaningfully adjusted during 2022, having started the year with a duration near zero and ending the year with a duration of around 3.5 years.

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.

ESG Integration

The managers consider ESG (Environmental, Social and Governance) 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 feel investors will be rewarded appropriately for the associated risks. They will also engage with company management in instances where ESG risk is material for bondholders.

As a business, Invesco has a centralised team of ESG professionals, located in three regions: the US, Asia and EMEA (Europe, the Middle East and Asia). The global ESG team is responsible for implementing best practice across the firm including ESG integration, research, voting and engagement, and advising the product teams on ESG innovation. There are also ESG specialists within individual investment teams who are closely connected with the global ESG team.

Cost

This fund has an ongoing annual charge of 0.75%, but we've secured HL clients an ongoing saving of 0.25%. This means you pay a net ongoing charge of 0.50%. 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 1.14%* to investors, ahead of the -7.39% loss 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.

Over the last year the fund has performed better than the wider peer group, losing 4.64% compared to the peer group average loss of 11.70%. While 2022 was a difficult time to invest in bonds due to the impact of high inflation and rising interest rates, the fund has held up better than peers primarily due to duration management. Duration is a measure of how sensitive the fund is to interest rate changes, the higher the duration value, the more sensitive the fund is to interest rate changes. Because the fund typically had a low duration position compared to peers, this meant that while their bonds fell in value, they didn’t fall as much as the wider bond market as interest rates increased. Overall most areas the fund invests in lost value over 2022, however the managers were able to make a profit on some investments, mainly in government bonds. The profits on those trades were not enough to offset other losses though.

It is good to see the full flexibility of the fund continuing to be used by Stuart Edwards and Julian Eberhardt, with a proactive approach to increasing credit exposure where compelling valuations exist. The willingness to invest differently to peers is expected to continue so performance could be different too, which inevitably means there will be periods of underperformance.

We 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 31/12/2022.

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