13 Feb to 20 Feb 2015

Each week we highlight one of the funds from our Wealth 150 as our Fund in Focus. The Wealth 150 represents what we believe to be the best funds across the major sectors. This week Kate Marshall, Investment Analyst, looks at the Invesco Perpetual Tactical Bond Fund .

Paul Causer and Paul Read lead Invesco Perpetual’s Fixed Interest team. Together they run a number of successful fixed income portfolios and in our view are two of the UK’s finest bond fund managers. The team’s views are always interesting and we recently met with Paul Causer to delve a little deeper into their current thinking.

The manager believes we are in ‘unusual times’. So unusual, in fact, that few areas of the fixed interest markets currently offer much in the way of yield. Indeed, some areas of global government bond markets are trading with a negative yield (bond yields move inversely to prices so when prices rise high enough, and yields fall, investors are effectively paying for the money they are lending to the issuer).

How have bond markets got to this position? Since the 2008 financial crisis, central banks across the globe have, in some respects, distorted the markets. In a world of historically-low interest rates, investors who have traditionally gained a higher proportion of their income from cash deposit have been forced to take incrementally more risk to achieve a better return, or income, from their investment. Hence, money has flooded into the bond markets, pushing prices higher and yields lower.

Invesco Perpetual Tactical Bond Fund factsheet

Paul Causer and his team now find it difficult to find true value in many areas of the bonds markets. As such, the Invesco Perpetual Tactical Bond Fund maintains its fairly defensive positioning. This caused the fund to lag its peers last year as many areas of the bond markets made good gains, which surprised even some of the most experienced of bond managers. The fund did, however, achieve a positive return though this should not be seen as a guide to future returns.

Bond markets have historically been a good indicator of where the economy is heading. In the present environment, bond fund managers face a conundrum: interference from global central banks has distorted fixed interest markets, making it increasingly difficult to determine where we are headed.

Falling levels of inflation, however, mean we could see a further extension of low interest rates. That said, Paul Causer expects the US Federal Reserve will increase interest rates by 0.5% sometime between June and September this year (with June being his likely date).

As a global leader, a move in the US could mark the beginning of a step change. Other developed markets, such as the UK, could be likely to follow suit. It would be the first interest rate move in several years and the market would need to come to terms with this change in the cycle. At a time such as this, the manager believes caution and patience are warranted.

At present, the fund maintains a bias 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). The team view their positions in short-dated bonds, as well as in government bonds, as near-cash positions which can be sold quickly. This defensive element of their portfolios means they are well placed to weather turbulent market conditions, while it also provides fire power to take advantage of future buying opportunities or weakness in the market. The fund also maintains some exposure to higher-risk, high yield bonds and the managers also have the flexibility to invest in derivatives which involves additional risk.

Our verdict

The approach of Invesco Perpetual’s Fixed Interest team is to identify undervalued opportunities they believe will add value when markets are rising, but try and seek shelter when opportunities are lacking. Presently, the team are cautious in their short-term outlook for bond markets. The fund’s conservative positioning should see it in good stead in a more lacklustre environment for bonds or should bond markets run into trouble.

Overall, this is a portfolio of the team’s best ideas, focusing purely on total returns without an income constraint. This approach does rely on them making the right calls and if they get it wrong the fund will fall in value. We feel their experience combined with a proactive approach should be beneficial for long-term fixed interest investment and the fund features on the Wealth 150+ list of our favourite funds at the lowest annual fund charge.