The freezing of the money supply was one of the principle reasons for the demise of many bond fund managers in 2008. Though the situation has improved, many experts suggest that liquidity remains at dangerously low levels, and fear that multi-billion pound bond funds could find it particularly difficult to redeem clients if there is a major exodus from the asset class.
Causer (pictured), who runs a number of funds at Invesco Perpetual including the £5.6bn Corporate Bond fund, accepts that liquidity isn’t as good as it was in 2007, but says he has had no problems running multi-billion pound mandates.
In an exclusive interview with FE Trustnet, he said: “The issue of liquidity is a characteristic of the market and all markets, and it ebbs and flows. In my opinion it’s blown out of proportion – it doesn’t add up and isn’t particularly logical.” “Liquidity right now is not as good as it was in 2007. In 2007 liquidity was as good as I’ve seen it – there were a lot of issuances, and a lot of activity from market makers and credit funds.”
“The crash shook up everything. It created something that we’d never seen before – systemic risk. Banks were failing, markets froze and there were some major casualties on the funds side.”
“Now there is not as much bank trading and so liquidity has been impaired, but as I said it does ebb and flow. But is it so illiquid that it invalidates the asset class?”
Causer argues that this systemic risk has now subsided, making it much easier for bond funds to trade in and out of positions. He adds that the fund is invested predominantly in investment grade corporate debt, which is the most liquid area of the market.
Even if there is a run on the asset class, he argues that all bond funds will be affected in the same way – no matter the size – and warns that the arguments used by many of the critics of giant bond funds are fatally flawed.
“What scenario will cause us to have a problem more than anyone else? Although there are a lot of different sized funds out there, we’re all operating in the same market,” he explained.
“The issue of liquidity basically translates to: can investors get money out at the valuation they see?”
“In my opinion, if everyone wants to take money out of the asset class, then everyone would be hit. If you’re trying to sell £20m or £2m you are going to the same market makers. It’s the price you get for the bond which is the issue, not whether you’re going to be able to sell it.”
“If you’re in a small fund you can possibly get out, but they’d be affected by the change in price like everyone else.”
Causer says a giant bond fund like the one he runs would only be a significant disadvantage if it got into structural difficulty, but for obvious reasons he doesn’t expect this to happen.
“There would have to be an adverse situation, when there is a run on a fund for a specific reason. This is very different,” he said. “Investors are right to ask questions, but in general I don’t think it makes sense. We’re all working in the same market.”
“I think this is a problem that doesn’t exist until there is a systemic problem, and even then there will be some liquidity.”
“There is still liquidity – there have been record issuances of late though market marking is not as good. Since I’ve been running funds I haven’t had problems with liquidity. We have a lot of cash and short-dated bonds which helps, though this is a portfolio decision rather than a liquidity decision.”
“It’s sometimes actually harder to move money in than move money out but we have a diversified portfolio, so there are a lot of options,” he added.
The manager believes that the current campaign against giant bond funds is a dangerous one, and could result in some investors switching in to substandard funds.
“There is a reason why there are big and little funds,” said Causer. “There is no reason why there should be an equal distribution of money across them.”
“The reason funds are big is down to performance – we operate in a very competitive environment, and the funds that have proven themselves are going to get the attention. Also they get big because of the performance over a long period, in that the assets naturally grow.”
“You have to look at a fund for the right reasons. To say ‘you should get out of a particular fund just because of its size, and go into a smaller fund’ does not seem to me to be a particularly well thought through argument.”
“Sure, give it to the small fund if you rate the manager, and take it out of the large fund if you don’t think the manager will be able to deal with the inflows, but I think investors need to make a decision about a fund based on a range of considerations including the long term track record.”
Causer is one of the most respected fixed interest managers in the industry. He runs nine bond funds in total, six of which sit in the IMA unit trust and OEIC universe. These have combined assets under management (AUM) of over £10bn.
His standout performers are Invesco Perpetual Corporate Bond, Invesco Perpetual Monthly Income Plus and Invesco Perpetual European High Yield, which are all top quartile performers in their relevant IMA sectors over a one, three and five and 10 year period.
Performance of funds and sectors
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| Invesco Perp Monthly Income Plus | 11.77 | 24.65 | 68.58 | 123.84 |
| IMA Sterling Strategic Bond | 4.44 | 16.82 | 43.09 | 58.16 |
| Invesco Perp European High Yield | 16.56 | 39.4 | 86.21 | 120.98 |
| IMA Sterling High Yield | 8.39 | 21.8 | 58.38 | 90.44 |
| Invesco Perp Corporate Bond | 7.25 | 17.63 | 55.4 | 72.26 |
| IMA Sterling Corporate Bond | 2.74 | 15 | 41.78 | 47.99 |
Source: FE Analytics
He co-manages all of these funds with Paul Read.
Invesco Perpetual Tactical Bond and Invesco Perpetual Global Financial Capital also have strong records, though neither has yet passed the crucial five year milestone.
Causer runs a number of mixed asset funds as well, including the £2.5bn Invesco Perpetual Distribution portfolio, which he co-manages with Read and FE Alpha Manager Neil Woodford. The five-crown rated portfolio is a top quartile performer in its IMA Mixed Investment 20-60% sector over a one, three and five year period.
He is also responsible for two investment trusts – City Merchants High Yield IT and Invesco Leveraged High Yield IT.
The manager’s cumulative record is very strong; FE data shows he has returned 110.76 per cent over the last decade, compared to 78.43 per cent from his peer group composite.
Performance of manager and peer group composite over 10yrs
Source: FE Analytics
Read FE Trustnet next week to read Causer’s views on the bond bubble, and the areas where he sees value across the fixed interest market.
