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Paul Causer: Investors are rushing into the riskiest area of the bond market

24 October 2014

The star manager tells FE Trustnet that he’s being as defensive as he possibly can in his Invesco Perpetual High Yield fund.

By Joshua Ausden,

Editor, FE Trustnet

The search for yield is pushing investors into the riskiest area of the bond market, says Invesco Perpetual’s Paul Causer, who believes that high yield investors could be set for a difficult period in the foreseeable future.

High yield bonds have been a great place to be since late 2011, delivering equity-like returns with significantly less volatility.

FE data shows the average IMA Sterling High Yield fund has returned over 30 per cent over the past three years.

Performance of sector and index over 3yrs


Source: FE Analytics

While prices have risen significantly, funds specialising in the asset class remain the highest yielding for bond investors, with the average portfolio in IMA Sterling High Yield currently yielding 5.6 per cent.

This compares to an average of 3.6 per cent in IMA Sterling Corporate Bond and 2 per cent for IMA UK Gilts.

The recent bout of volatility has led to significant losses for some high yield bonds, though losses in UK funds has been moderate with only one losing more than 10 per cent since the beginning of September.

ALT_TAG Causer (pictured), who runs a number of funds at Invesco including one with a high yield focus, believes there could be much more pain to follow, which will punish yield-hungry investors buying up products specialising in the area.

“Some of the changes we have seen recently in high yield have been extreme,” he said in an exclusive interview with FE Trustnet.

“Yields have compressed across the board and there has been next to no volatility. However, a change in sentiment and some idiosyncratic problems has led to losses of up to 20 per cent in some areas.”

“It could get rough. We’ve had a long period where everything has been highly correlated, but I think we could be at the beginning of that change. I’m very worried about high yield. Every element suggests you should be wary.”

“However, because the reach for income is so huge, the best sellers at the moment are the higher yielding funds. Investors are asking: ‘how can I get an income?’ In Europe we’ve seen a tonne of money going into our higher yielding fund.”

Causer runs the Invesco Perpetual High Yield fund with fellow head of fixed interest Paul Read.

He says the pair is currently “as defensive as possible”.

“We’ve got our hedges on and have as little in high yield as possible,” he said. “Elsewhere we are also light – they are very large funds but the percentage weights are very small.”

Causer says his £3.9bn Invesco Perpetual Monthly Income Plus fund has just 20 per cent in high yield, down from a high of 80 per cent, while the £3.1bn Invesco Perpetual Distribution fund now has less than 10 per cent in the asset class.

The managers’ cautious stance has helped their High Yield fund protect against the recent sell-off.

Performance of fund and sector over 3 months


Source: FE Analytics

Looking at his other bond funds, Causer admits he has been caught out by the strong performance of bonds in 2014.

Invesco Perpetual Corporate Bond and Tactical Bond have both underperformed their sectors this year, though have still made healthy returns of over 4 per cent.

“In certain products you could say we’ve had a poor year, as we took the view that at the very least yields wouldn’t go any lower, but they have,” he said.

“The consensus was that they would go higher, until the last few weeks you would have made money in every part of the bond market. Everyone has been moaning about the low levels of income, but you’ve actually been making some decent capital gains.”

Invesco Perpetual Tactical Bond has a running yield of just over 1.5 per cent, though the figures for Corporate Bond and High Yield are much higher, at 4.02 and 5.11 per cent respectively.

Causer remains cautious in his outlook for bonds and is defensively positioned as a result.

As well as having very low high yield content, Tactical Bond is sitting on over 16 per cent cash.

“50 per cent of the world’s government bonds are yielding less than 1 per cent and 80 per cent are yielding less than 2 per cent. This is the world we are in,” he said.

“It makes it bloody hard for a bond manager because there is not a great deal of value. However, we are here because this is the state of the world after one of the greatest financial crises in our lifetime.”

The manager denies all talk of a ‘bond bubble’ however, believing such a description “misses the point”.

“A bubble is something that loses all sense of reality. Often the asset doesn’t go back to fair value, and is sometimes even destroyed,” he explained, citing the dot com bubble as a good example.

“Bond markets are different. They are linked to the interest rate cycle and changes in policy. There may be lower yields and there may be a re-pricing when policy changes, but it’s all about the cycle – there is still a sense of reality.”

“What bonds have done over the past 30 years is meaningless. It’s about what happens now to policy.”

“You get an 88 point basis point yield from a bund. To invest in one for the long term is unthinkable, because it has no return. However, it’s still a risk management instrument. It’s the ultimate place to go if you want to protect capital, and the yield could still go down.”

Causer acknowledges that it will still be possible to lose vast amount of money in certain parts of the fixed interest market however, citing the significant losses of long-dated US TIPS in May last year as a good example. High yield could well be next, he says.

Stephen Anness
, manager of the Invesco Perpetual Global Opportunities fund, agrees that the hunt for yield could burn investors, but believes there is much more of a problem in bonds than there is in equities.

“There are definitely issues in high yield credit. When you look at valuations, some are hard to justify right now,” he said.

“When you transfer that into the equity market I think the problem is less obvious. The yields on bonds have come right down but the yield in equities is still not bad. However, within that I do think that the dividend yield in a number of companies is unlikely to grow and are at risk of being cut.”

Anness thinks some companies have put too much of an emphasis on dividends and share buy-backs rather than reinvesting in their businesses – the polar opposite to what happened in the lead-up to the global financial crisis.

Causer agrees that from an income point of view, equities are more attractive than bonds at the moment, though he thinks the former are more susceptible to a steep sell-off.

He sympathises with recent research from Man Group, which suggested that equities have never been more attractive to bonds from purely a yield point of view, as reported in a recent FE Trustnet article.

Relative value between FTSE 100 and 10 year gilt yields since 1920


Source: Man Group

The manager currently has a sizeable weighting to equities in his mixed-asset portfolios, including Invesco Perpetual Distribution and Monthly Income Plus.

The latter can hold a maximum of 20 per cent in equities, and currently has a 17 per cent weighting.

“There are some risks of a correction in the equity market, but these are income-focused funds,” said Causer, highlighting that those mentioned above pay a dividend to investors every month.

“If you look at Europe, the dividend yield is above the average top-rate corporate bond yields. There has been a huge amount of convergence in high yield. It’s the first time this has been the case in my career. This is why I’m not slashing my equity weightings.”

Causer and Read made what proved to be an excellent call in 2011 when they bought heavily into financial debt. This contributed to the managers’ great run in 2012 and 2013.

Performance of manager and peer group composite over 3yrs


Source: FE Analytics

Causer says he continues to have a healthy weighting to financials on a legacy basis, but thinks much of the upside has already played out.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.