Historically low yields on investment grade corporate and government debt has forced fixed interest investors to delve into riskier assets to prop up their income stream.
One area that has benefited greatly is high yield credit, which has rewarded investors not only with attractive yields but also capital growth.
According to FE Analytics, the ML Sterling High Yield index has returned 16.7 per cent over the last 12 months while the FTSE British Government All Stocks index has lost money.
Performance of indices over 1yr
Source: FE Analytics
These returns have built on high yield’s strong run post-financial crisis. Over five years the ML Sterling High Yield index has made an impressive 196.45 per cent.
However Read (pictured), who is co-head of fixed interest at Invesco Perpetual, says this bull run has come to an end. He understands why investors may still be attracted to the high yield market given the income-potential that’s on offer, but he says they need to be very careful with this area of the market. "I have a lot of sympathy with this question," Read said.
"There has been a lot of money made over recent years. However, that now means that huge amounts of the high yield market are now trading over par or to call. Therefore it is hard to argue that there is much left in the way of capital upside left."
"However, in the context of the market and with them yielding in the way of 6 to 7 per cent, then the coupon still looks relatively attractive. However, while it still remains a source of attractive income, there is virtually no capital upside left."
"Given where yields have got to, you now have to be careful that you are not reaching too high for yields," he added.
Read admits that the whole fixed income market faces a difficult future. However, though he admits that we are currently in a rising yield/falling price environment, there are still reasons to be invested in bonds.
"Bond yields have already moved higher this year," he explained.
"However, there are still reasons to hold bonds. We can discuss relative valuations, but there are people who need bonds. Some have regulatory reasons while others just need income and the asset class still produces low risk income," he added.
Read and co-manager Paul Causer run 14 funds at Invesco Perpetual.
Read has run funds since 1995. Since the turn of the century, he has returned 181.02 per cent while his peer group composite has returned 123.87 per cent.
Performance of manager vs peers since Jan 2000
Source: FE Analytics
His flagship fund, the £5.5bn Invesco Perpetual Corporate Bond portfolio, has been a top-quartile performer in the IMA Sterling Corporate Bond sector over both five and 10 years.
One of the major concerns surrounding fixed income is the low levels of liquidity. Read acknowledges this is a concern and warns that some assets could suffer in a sell-off.
"I would say that markets are behaving pretty well. However, anecdotally and by seeing aggregate fund flows, there has certainly been money coming out of bonds, with some big US funds seeing significant outflows," he said.
"That hasn’t led to a significant dislocation in markets yet, but that isn’t to say it isn’t a worry."
"The corporate bond market has grown a lot over recent years. What I mean is that the door you need to get through is very small compared with the rest of the market and we could see dislocations if there is a lot of selling."
"We saw it with emerging market debt funds earlier in the year and it pushed the prices of those assets down," he added.
Some experts have warned that larger bond funds would be hit hardest in an illiquid sell-off as they would take much longer to exit their positions.
However, just as Causer recently told FE Trustnet, Read says that this is an overstated view. Read says that if anything, running larger funds could be a help in such a scenario.
"We always think about liquidity and we know we need to manage liquidity, which is based around market value, fund flows and what might happen to yields," Read explained.
"As it stands we have significant liquidity in our fund range at Henley at the moment. In our big funds we have a lot of liquidity, which we count as cash, gilts and bonds which mature in the next year or so. It makes up around 15 to 20 per cent of the funds."
"That means we have liquidity across the cycle and can drive significant bargains when other funds are seeing outflows," he added.
Invesco Perpetual Corporate Bond has a yield of 3.94 per cent and an ongoing charges figure (OCF) of 1.19 per cent. It requires a minimum investment of £500.
