But it might not have slipped investors’ attention that the fund has recently fallen into the fourth quartile.The five FE Crown-rated fund launched in January 2004 and resides in the IA Mixed Investment 20%-60% Shares sector. Causer and Read run the bond element of the portfolio while Woodfood took care of the equities until the end of 2013.
FE Analytics shows it’s top quartile over three, five and ten years – over the past decade it’s made 104.69 per cent, putting it in second place in the sector where the average return was 58.15 per cent.
Performance of fund vs sector and index since fund launch
Source: FE Analytics
A closer look at the £3.3bn fund’s history shows why it has been so popular, although like all funds it has had periods of underperformance. It lost about 5 percentage points more than its peers in 2008 after the managers invested in cheap bank debt too early.
However, it went on to make 30.58 per cent in 2009 – about the double the return of its average peer. Performance was strong in following years and secured the fund’s position near the top of the leader board over thee and five-year periods.
However, over one year the fund’s returns look less appealing. Its gain of 4.67 per cent against the sector’s 6.77 per cent means it has dropped into the ninth decile and is ranked 111 out of 133 funds.
Followers of the fund will know this roughly coincides with the a management change in October 2013 when the FE Alpha Manager Woodford left Invesco Perpetual and Ciaran Mallon took over his sub-portfolio.
Some might be wondering if the new management of the fund has led to the underperformance or if there are other contributing factors which are simply beyond the managers’ control?
Andy Parsons, head of investment research at The Share Centre, said: “I think it’s a very capable team. Ciaran wasn’t unknown to people and he’d been there quite a long time, since January 2005 in fact, so he was known and respected.”
“But, maybe for some retail investors, he wasn’t that big star name that they knew of. Yet, he was there managing money. He had a role to play within Invesco Perpetual.”
“Yes, it does look like it’s underperformed slightly over one year but I’m not concerned about that. It’s one that I keep on the radar.”
Thomas McMahon, fund analyst at FE Research, says the fund's bond allocation has limited recent returns, not Mallon's equity portfolio.
“Causer and Read have kept their duration lower than the market and have built up a high allocation to cash and short-term instruments with low yields,” he explained.
“It is the long-duration funds that have done well over the past year as bonds have rallied on negative news flow and falling inflation. The managers think there is little value in the bond market and are likely to retain their defensive positioning until rates start to rise.”
McMahon added: “It is also worth pointing out that this is a straight bonds plus equities portfolio, so doesn’t invest in property and alternatives like some other funds in the sector. Many of the funds that have done well over the past year invest in property, for example, which has also had a good year.”
Parsons (pictured) believes that, with a promising yield of 4.21 per cent and the fact investors are not losing growth in return for income, the fund is well worth holding.
However, he does not own the fund himself because he already has the Invesco Perpetual Monthly Income Plus fund, which is headed by the same management team.
Parsons said: “We just happen to have gone with the Monthly Income Plus but they’re very similar and they seek to achieve the same type of return.”
“The difference is, you can have more equity in the Distribution fund because it’s in the 20/60 sector, whereas the Monthly Income Plus is a strategic bond fund, so that’s a far more debt-driven portfolio.”
Performance of both funds vs sectors since fund launch
Source: FE Analytics
Parsons emphasises that the Invesco Perpetual Distribution fund should not to be sold if investors remain happy with it, as it has an attractive yield, a very good management team and strong long-term performance.
“No management team are going to be right at the top of their sector all of the time,” he added.
Martin Bamford, chartered financial planner and managing director at Informed Choice, agrees that a one-year blip does not mark out a fund as being a weak performer.
“Investors have a habit of judging fund performance too quickly, where investing should be a long-term activity not something measured in weeks or months,” he said.
“Over the course of five years, this fund remains one of the top ten performers in the IA Mixed Investment 20-60% Shares sector. The expertise of Paul Read and Paul Causer on the fixed income side of the fund is exceptional and Ciaran Mallon has been settling into his new role following the departure of Neil Woodford a little over a year ago.”
Bamford also explains that Mallon prefers a low turnover of stocks on his portion of the portfolio, which can result in slightly worse performance in the short term. However, he adds that investors in the fund would have been used to this approach from their experience with Woodford.
“The very large size of the fund would probably be our biggest concern,” Bamford said. “This is why we wouldn’t recommend this fund to new clients.”
“There is also a lack of control over asset allocation and therefore risk from an investor perspective, so this is only a fund to consider if you are comfortable with a 60/40 bond/equity allocation regardless of stage in the market cycle.”
Other investors also attribute the fund’s recent underperformance to asset allocation and the defensive nature of the bond team specifically, pointing out that the market has moved in the opposite direction to their views.
Chelsea’s Darius McDermott (pictured) said: “The two Pauls, like a number of bond managers, were extremely concerned about their asset class and hence they have been de-risking.”
“Their views, which are views I would have shared, have been early. Bonds have continued to do well and bond funds who don’t look at duration as much as they should do have done better.”
McDermott remains firmly rooted in the ‘buy’ camp and explained that, not only does he understand the driving force behind the poor relative performance, he doesn’t worry about one-year statistics anyway.
He said: “I think this is a good example of remembering why you own the fund in the first place.”
“If you own a fund because you expect the managers to make duration calls and if you own a fund because you actually agree with their views on the asset class, then being very defensively positioned was the way forward and you cannot penalise them.”
“Let’s be honest, how many people are nervous on bonds at the moment?”
Meera Hearnden, senior investment manager at Parmenion, also believes that the fund’s underperformance has nothing to do with the equity income portion of the portfolio.
She said: “If you look at Ciaran Mallon's Invesco Perpetual Income & Growth fund, it has performed very well over the last 18 months despite Woodford's departure and his macro overlay. Ciaran Mallon manages these portfolios in a similar way, so it is a fair comparison to look at his income and growth fund.”
Performance of both funds vs sectors over 18 months
Source: FE Analytics
Hearnden agreed with McDermott that the fund’s underweight in government bonds has driven the short-term underperformance.
She added: “Given the lack of value in many government bonds including gilts and US treasuries, the fund's positioning appears prudent in my view.”
“I feel its approach could deliver outperformance going forward, though its high exposure to the financial sector could lead to higher volatility if these bonds come under pressure.”
Invesco Perpetual Distribution has a clean ongoing charges figure of 0.82 per cent.