We believe that holding bonds in an investment trust brings several unique characteristics that should be appealing to investors, particularly for those who are looking for an income from their investments.
One such characteristic is that an investment trust can borrow money to invest, often called “gearing”.
This is a key difference with open-ended funds (e.g. OEICs, ICVCs or unit trusts1) which are not permitted to borrow money. Borrowing can allow a bond fund manager greater flexibility to gain more market exposure or to focus on the investments they like most. This ability, known as ‘gearing’, sets investment trusts apart from open-ended funds.
With Invesco Bond Income Plus Ltd (BIPS), our highly experienced managers use gearing as a tactical tool to increase the portfolio’s exposure to bonds we like, which can increase the level of income that investors receive and, if the bonds selected perform well, enhance total return.
There are limits on the amount of borrowing that the managers are permitted to use. BIPS is allowed to gear up to a level of 30% of the gross assets in the portfolio (approximately 40% of net asset value (NAV)), but in practice, the level of gearing is typically managed between about 10% and 25% of NAV. The level of gearing will depend on several factors, primarily the managers’ view of the opportunity available and the level of risk in the market.
For BIPS, we use ‘repurchase agreements2 to gear. This means:
The process of gearing can allow the investment trust manager more flexibility. We use the money we borrow to buy more bonds. The coupons from these bonds add to the income of the portfolio. As with any borrowing, there is a amount of interest that we pay on the loan, but the remainer adds to the income available for the payment of dividends.
Any capital return on the bonds accrues to the portfolio’s NAV. In a rising market, gearing can magnify portfolio gains. If bond prices are unchanged, the portfolio will still gain from the increased income. But in a falling market, because the portfolio holds more bonds than a non-geared portfolio, losses from falls in bond prices are increased and can more than offset the income gain.
Gearing gives us options in how we deliver income for the investment trust. For example, when we identify a potential opportunity we can borrow money to buy additional higher credit quality bonds, with the aim of boosting the income received in the portfolio. At other times, we can hold lower credit quality bonds that may produce a similar level of income, without the need to borrow money. So, for the portfolio, the ability to gear allows us to take a different mix of risks, not necessarily more risk.
Gearing is seen by many as one advantage of the closed-end structure of a trust. It can be a useful lever for managing the risks of the portfolio and boosting income. Using gearing is also a particular skill set of the fund managers of BIPS. It is one of the reasons we think investment trusts are an attractive vehicle for managing high yield bonds and providing consistent levels of high income to investors.
For more information on Invesco managed investment trusts and fund manager insights, explore our investment trust pages.
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OEICs – open ended investment companies; ICVCs – open ended investment company with variable capital: Unit trusts – open ended grouped investment product.
A repurchase agreement is a form of short-term borrowing, mostly in government securities.
Collateral refers to assets that a borrower pledges as security for the purposes of borrowing
A coupon is the amount the borrower will pay each year as a reward to the lender until the bond matures and the debt is repaid.
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.
Invesco Bond Income Plus Ltd has a significant proportion of high-yielding bonds, which are of lower credit quality and may result in large fluctuations in the NAV of the product.
Invesco Bond Income Plus Ltd may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events.
The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.
Invesco Bond Income Plus Ltd uses derivatives for efficient portfolio management which may result in increased volatility in the NAV.
All information correct as at 4 June 2024 unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell 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.
If investors are unsure if this product is suitable for them, they should seek advice from a financial adviser.
Views and opinions are based on current market conditions and are subject to change.
For more information on our products, please refer to the relevant Key Information Document (KID), Alternative Investment Fund Managers Directive document (AIFMD), and the latest Annual or Half-Yearly Financial Reports. This information is available on the website: https://www.invesco.com/uk/en/investment-trusts/invesco-bond-income-plus-limited.html.
Further details of the Company’s Investment Policy and Risk and Investment Limits can be found in the Report of the Directors contained within the Company’s Annual Financial Report.
Invesco Bond Income Plus Limited is regulated by the Jersey Financial Services Commission.
