Lewis Aubrey-Johnson, head of fixed income products at Invesco Perpetual, believes monetary policy is working and we are likely to see a slow but progressive recovery in developed markets, from which fixed income investments can take advantage.
He also highlights the diversification benefits of bonds. “Government bonds, over the long term, can act as great sources of diversification. If a bearish scenario does play out you want some government bonds in your portfolio even at these very low yields. Fixed income definitely has a part to play in an overall portfolio.”
While the opportunities in global government bonds remain limited at present, with large swathes of the market trading on negative yields, the fund has the flexibility to invest in corporate bonds and currencies. “With rate rise expectations disappearing it could be described as an interesting time,” says Aubrey-Johnson. Yields have been falling, there’s a decline in inflation expectations, we’ve seen some softening of data and people are worried about China. Conversely, yields on corporate credit [bonds] have been rising.”
Government bond yields are currently low
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Past performance is not a reliable indicator of future returns
Source: Bloomberg as at 31 March 2016
In some parts of the corporate bond market prices have fallen and companies look interesting. “We have been buying credit,” says Aubrey-Johnson. “We’ve bought some energy assets such as Tenex and BP, and we see opportunities in financials. In total the fund now has around 13.5% in investment grade bonds.” He adds there is scope to increase positions further if opportunities arise.
Europe in particular looks attractive, in Aubrey-Johnson’s view. “The euro area is recovering. Default rates [on corporate bonds] are low. The credit fundamentals of companies are perfectly okay in our view, so this presents the greater of opportunities.”
One of the main aims of the fund is to perform differently to other bond funds in the Invesco Perpetual stable, and Aubrey-Johnson says this is being achieved. “We’re defensively positioned. We’ve also been adding to inflation-linked bonds, which now make up 30% of the portfolio. We’re trying to profit by buying inflation-linked bonds and hedging out the underlying duration through government bonds.” The overall duration of the fund (a measure of its sensitivity to changes in interest rates) is much lower than the global government bond market. The low duration should partially mitigate the negative impact of rises in the yields of core government bonds such as US Treasuries.
In terms of currencies, Aubrey-Johnson describes the fixed income fund management team as long-term structural US dollar bulls, although they are not necessarily wedded to this position. Currently half the fund has exposure to sterling, with around 30% dollar denominated and the remainder in a combination of euro, yen, Mexican peso, Norwegian krone and Swedish krona.
“We believe the UK economy is stronger than is being perceived by gilt [UK government bond] markets,” says Aubrey-Johnson. “Banks have healed themselves, however we’ve got to get through the current period of austerity and the uncertainty over Brexit. With 2 to 2.5% growth this year real incomes are growing. Things are not as bad as markets are pricing in.”
The focus of the fund is on a combination of income and capital growth generating a good level of total return, with some being generated from foreign exchange risk.” The fund can give you a markedly different return to other funds we manage. It’s a useful ballast to other parts of your portfolio,” says Aubrey-Johnson.
Invesco Perpetual Global Bond Fund performance
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Past performance is not a reliable indicator of future returns
Source: Bloomberg as at 31 March 2016
Find out more or buy the Invesco Perpetual Global Bond Fund.
These are the views of Lewis Aubrey-Johnson, Invesco Perpetual and do not represent TD Direct Investing.
Remember that each fund is unique and hence exposed to different levels of risk. Some are relatively low risk, whilst others can be very risky and those will only be appropriate for more sophisticated investors.
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