Report Release Date: 29 Jul 2010
Analyst: Jackie Beard
Morningstar Opinion
We have strong conviction in Invesco Euro Corporate Bond.
There are many factors supporting our view. Comanagers Paul Causer and Paul Read have been at the helm since the fund’s launch in 2006, but their partnership extends back to 1995, offering a level of consistency in fund manager tenure that’s rare. Their collective experience exceeds 50 years and together they’ve witnessed a number of market cycles.
This experience is key as macro analysis is a big part of their process. They aim to understand the current environment and its likely path and then translate this through into their credit selection, as they want primarily those credits that fit their macro picture. They wouldn’t refuse to buy a bond that didn’t fit their macro view, but it would need to have other compelling traits. The portfolio is heavily diversified, with credits from more than 170 issuers, which helps mitigate default risk. They also hold a few illiquid names, but in this fund these are only at the margin; investors should be aware of this, but the managers argue these credits are providing a steady income stream whilst they wait for their return potential to be realised.
Given their macro overlay, the managers aren’t afraid to differ from the benchmark and it’s not unusual to see the portfolio look out of step with peers. Indeed, they are unconstrained in their portfolio construction. This was on show toward the end of 2008 when they bought heavily into financials as the market collapsed. They were early to the trade and the fund posted a capital loss that year of more than 6%. That said, they limited this loss relative to peers in the Morningstar Euro Corporate Bond category. They held their nerve into 2009 and, when the market turned in March, they were well positioned to capture this rally.
In 2009 the fund gained over 30% and more than made up for the previous year’s losses. We wouldn’t expect these equity-like returns going forward as that was an exceptional time in the markets. But the managers have demonstrated their ability over the long term, too. Here, they have beaten their average peer by over 3.6 percentage points annualised. They also ran IP Global Bond for over 10 years and beat their average peer by nearly 1.5 percentage points annualised.
It’s clear to us that Causer and Read are an integral part of the strong investment ethic that exists at the firm. They are surrounded by several managers of whom we have high opinions across the global equity space, which gives them added resources on which to draw. The fixed-income team is a small unit of eight but we think they make the most of their expertise and they are well resourced to execute their process to good effect.
Our one caveat is on fees. The managers have shown they can overcome the high TER but we think some economies of scale could be passed on. The fund receives our Superior rating.
*The above returns are in EUR terms.
To learn more about the fund, please click here.
To read the summary report, please click here.
