Broadening your investment universe to include both bonds and equities can help to maximise the income opportunities available.
One of the most important decisions when taking such an approach is how much to allocate to each asset class. For investors who prefer to leave such considerations to an expert fund manager, mixed asset funds can provide an interesting option.
Here at Invesco, we have a long and successful history of investing in mixed asset funds. The first was launched into the UK market in 1999. The successful formula has since been applied to several other strategies with differing equity allocations. The Invesco Pan European High Income Fund builds on this track record seeking to provide investors with a balance of income and capital growth over the long-term.
The very strong performance of financial markets since the pandemic began in February 2020 has significantly reduced the income available within bond markets. Data from ICE BofA for example show that European Currency High Yield bond yields reached a record low of 3.22% at the end of February. For context, at the height of the pandemic in March yields for this area of the market reached a peak of 7.05%.
However, while the absolute level of income available has fallen, there are still opportunities. This year we have been able to add quite a number of new bonds in instances where we’ve liked the issuer and thought the coupons were attractive.
For the strongest issuers, coupons on senior bonds are pretty low, but some also issue more junior debt and offer higher yields as a result.
Although the absolute levels of yields remain low, this year has also seen a rise in German government bond (Bund) yields to become. The rise has been greatest for longer dated bonds resulting in a steepening of the yield curve.
This rise is particularly relevant for banks. Less negative yields and steeper yield curves are good for banks. The stimulus that is flowing into the economy is also positive as it should reduce non-performing loans as well as raising overall economic activity and so earnings.
In our view this positive backdrop, provides an opportunity. We’ve been applying our extensive experience in this sector over recent months to capture income from banks that have been issuing subordinated bonds with relatively attractive coupons.
The bond portfolio – tilted toward income
The focus on income of our mixed-asset funds means that bond exposure is predominantly tilted toward corporate bonds, typically high yield and higher yielding investment grade.
Why we like equities in our income strategies
Lewis Aubrey-Johnson discusses how the Invesco Pan European High Income Fund is benefitting from its equity holdings.
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested. Debt instruments are exposed to credit risk which is the ability of the borrower to repay the interest and capital on the redemption date. The fund uses derivatives (complex instruments) for investment purposes, which may result in the fund being significantly leveraged and may result in large fluctuations in the value of the fund. Changes in interest rates will result in fluctuations in the value of the fund. Investments in debt instruments which are of lower credit quality may result in large fluctuations in the value of the Fund. The fund may invest in distressed securities which carry a significant risk of capital loss. The fund may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events. The fund may invest in a dynamic way across assets/asset classes, which may result in periodic changes in the risk profile, underperformance and/or higher transaction costs.
Data as at 28.02.2021, unless otherwise stated. This marketing communication is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
For more information on our funds and the relevant risks, please refer to the share class-specific Key Investor Information Documents (available in local language), the Annual or Interim Reports, the Prospectus, and constituent documents, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements.
This marketing document is not an invitation to subscribe for shares in the fund and is by way of information only, it should not be considered financial advice. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
Persons interested in acquiring the fund should inform themselves as to (i) the legal requirements in the countries of their nationality, residence, ordinary residence or domicile; (ii) any foreign exchange controls and (iii) any relevant tax consequences. As with all investments, there are associated risks. This document is by way of information only. Asset management services are provided by Invesco in accordance with appropriate local legislation and regulations.
The fund is available only in jurisdictions where its promotion and sale is permitted. Not all share classes of this fund may be available for public sale in all jurisdictions and not all share classes are the same nor do they necessarily suit every investor. Fee structure and minimum investment levels may vary dependent on share class chosen. Please check the most recent version of the fund prospectus in relation to the criteria for the individual share classes and contact your local Invesco office for full details of the fund registration status in your jurisdiction.
Please be advised that the information provided in this document is referring to Invesco Pan European High Income Fund Class A (quarterly distribution - EUR) exclusively. This fund is domiciled in Luxembourg.
