For those investors who want to combine the expertise of Invesco Perpetual’s highly-rated fixed income and equity teams, the group offers the £4bn Invesco Perpetual Monthly Income Plus fund and the £3.1bn Invesco Perpetual Distribution funds; which both have FE five crowns and sit on the FE Select 100.
However, in a recent FE Trustnet article, one of our regular commenters asked how the two portfolios differ which, on the face of it, is a very good question for either private investors or advisers looking to build a portfolio.
That is because, optically, there aren’t many differences between them.
Firstly, they are both a mixture of bonds and equities and are run by the same managers, as Paul Causer and Paul Read look after the fixed income allocations while Ciaran Mallon has taken on the equity side following Woodford’s departure.
They are also of a comparable size, have topped their respective sectors over the longer term, pay out their dividend monthly, have yields between 4 and 5 per cent and have had very similar return profiles over the years.
According to FE Analytics, for example, Invesco Perpetual Monthly Income has been the best performing portfolio in the IMA Sterling Strategic Bond sector over 10 years with returns of 101.96 per cent.
Then, with returns of 106.22 per cent, Invesco Perpetual Distribution has been the third best performing portfolio in the IMA Mixed Investment 20%-60% Shares sector over the last decade.
Performance of funds versus indices over 10yrs
Source: FE Analytics
Both have had a maximum drawdown, which measures how much an investor would have lost if they bought and sold at the worst possible time, of around 30 per cent over that time.
As a point of comparison, the FTSE All Share has had a max drawdown figure of 45 per cent, while the iBoxx Sterling Gilts All Maturities max drawdown has been substantially lower at 7 per cent; again showing that the two funds are hybrids of the two asset classes.
So given that information, how can investors choose between the two? We asked Thomas McMahon, fund analyst at FE Research, and he said that though there isn’t much breathing space between the portfolios, there is one major difference.
“The major difference is that the managers think of Monthly Income Plus as the more income orientated fund. Because of that, the fixed income portfolio of Monthly Income Plus tends to dip more into the lower end of investment grade credit and invest more in high yield, trying to eke out a higher income,” McMahon said.
“Apart from that, there really isn’t too much of a difference. They are run by the same managers with the same team of analysts and the same views on the macroeconomic picture and on where there is value.”
“Both funds invest in the same themes, with 25 to 30 per cent in the subordinated bank debt they picked up cheaply during the financial crisis.”
He added: “Both are holding more in liquidity – i.e. cash and short-dated bonds – as the managers see little value in the market and are waiting for better opportunities.”
This focus on income can be illustrated through data from FE Analytics.
It shows that if investors had bought £1,000 worth of units in the two funds 10 years ago, they would have earned £751.52 in income from the Monthly Income fund, close to £100 more than they would have received from Distribution.
Income earned on £1,000
Source: FE Analytics
That being said, the £653.46 paid out by the Distribution fund is more than the large majority of funds within IMA UK Equity Income sector over that period.
Monthly Income offers the highest yield of the two at the moment at 4.79 per cent, which is 60 basis points higher than Distribution’s.
Also, though there are numerous similarities between Invesco Perpetual Monthly Income Plus and Distribution, the fact that they sit in two different sectors is a tell-tale sign that they are run in slightly different ways.
Distribution sits in the IMA Mixed Investment 20%-60% Shares sector and, without sounding too obvious, can therefore hold anywhere between 20 per cent and 60 per cent in the equity market. On the other hand, as a member of the strategic bond sector, Monthly Income Plus can have a maximum of 20 per cent in equities.
McMahon says this clear differentiation goes a long way in illustrating which fund is best for certain investors.
“It is a fact that Monthly Income Plus has paid out a greater level of income, so if that’s what you want from your fund, then this is probably the best fit,” he explained.
“The equity component is much bigger in the Distribution fund and that is obviously something to be aware of. Distribution has around 35 per cent in equities while Monthly Income Plus has 16 per cent, and that figure has been fairly consistent. You can therefore expect Monthly Income Plus to be lower risk, but generate a lower annualised return.”
Clearly, McMahon and the FE Research team are fans of the two funds. However, he says that they shouldn’t be used as a hedge against riskier funds given their make-up.
“Of course, neither of the two funds are pure bond funds so if you want a diverisifier away from equities, it would make more sense to go for Invesco Perpetual Corporate Bond, which is managed by Causer and Read as well,” he said.
“This invests in similar themes but as a bond fund is more of a duration play, with interest rate risk being a more important driver of return than credit risk, which is more important on Monthly Income Plus and Distribution.”
Read and Causer, along with the likes of Richard Woolnough and Ian Spreadbury, are seen as two of the most capable bond managers in the business and their flagship Corporate Bond fund, which weighs in at £5.5bn, has performed very well over the longer term.
They launched the fund in July 1995 and over that time it has returned 273.45 per cent, beating the IMA Sterling Corporate Bond sector by close to 100 percentage points in the process, according to FE data. That is a similar return to the FTSE All Share’s gains though, as the graph below shows, Invesco Perpetual Corporate Bond has given its investors a much smoother ride.
Performance of fund versus sector and index since July 1995
Source: FE Analytics
This Read and Causer fund has a yield of 4.26 per cent and also sits in the FE Select 100.
Out of the three funds, Corporate Bond is the cheapest with its ongoing charges figure (OCF) of 0.66 per cent. Monthly Income Plus has an OCF of 0.72 per cent, while Distribution is the most expensive at 0.82 per cent.
