A couple of our clients have been in touch this week regarding their legacy holdings in the Invesco Perpetual Corporate Bond fund.
This is a very popular fund, and with £5.6bn of assets under management it is little surprise that it features in a number of investor portfolios.
The queries are the result of a very poor period of fund performance over the past twelve months.
The fund currently sits in the fourth quartile in performance terms relative to the IMA Sterling Corporate Bond sector. Over a year, the fund has returned -2.12% compared to a sector average return of 1.22%.
It is worth noting that the fund remains a strong performer over three and five years. It has delivered first quartile performance over these periods of time, with a cumulative return of 23.57% over five years compared to a sector average of 14.90%.
So what has gone wrong with the fund over the past year to result in the poor spell of performance relative to the sector?
The Standard & Poor’s review of the fund last year, where it maintained a ‘AAA’ fund rating, points out that the fund takes less credit beta risk than the similar Invesco Perpetual Sterling Bond fund. Taking less risk always means less potential for return, and a fund taking less credit beta risk in the current economic cycle might be expected to deliver lower returns.
The investment guidelines for this fund allow the managers to invest up to 20% of the portfolio in higher yielding corporate bonds or indeed into gilts. This should provide the managers with sufficient flexibility to move into riskier or safer assets, depending on the stage of the economic cycle.
However, the massive size of this fund at £5.6bn is likely make it difficult for the managers to shift exposure to suitable assets in the future. This could even have been a factor in the recent poor performance of the fund, with poor liquidity levels in some fixed interest markets.
One of the issues we consider during our fund selection process is fund size. We feel it is important to select funds which are not too small and not too big. Small and big funds both present potential problems; the sustainability of some small funds results in their closure and the popularity of some big funds can make them difficult to manager effectively.
Size is not always a barrier to strong fund performance. The M&G Corporate Bond fund, for example, has £4.9bn of assets under management but has consistently delivered above average performance. Over the past year it has returned 3.58% compared to the -2.12% delivered by Invesco Perpetual Corporate Bond.
We might argue that some fund management groups are better equipped to manage very large portfolios than others. The strength and resourcing of the team supporting the fund manager or managers clearly has an impact on the ability to manage very large funds.
Different fund strategies in the IMA Sterling Corporate Bond sector will perform better or worse during different parts of the credit cycle. Some managers are better skilled than others at changing their strategy depending on market outlook, so as to capture greater value relative to their peers regardless of market conditions.
Investors in the Invesco Perpetual Corporate Bond fund are right to question the recent spell of poor performance, particularly when their equity holdings are unlikely to be adding much joy to the overall returns from a well diversified portfolio either.
Making the decision to hold or sell Invesco Perpetual Corporate Bond as a result of the recent underperformance is a tough decision to make. We cannot see any conclusive reasons to sell the fund at this time, although much will depend on how it fits within a wider portfolio and interacts with other funds the investor holds.
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