Invesco Bond Income Plus in demand – should you buy?

As interest rates start to fall, many risk-averse investors will be looking to lock in higher levels of income. But yields on longer-dated government bonds are already not much more than 4%, and on higher-quality corporate bonds they are scarcely higher. The yields on funds in the debt, loans and bonds investment-trust sector are significantly higher, with several of them exceeding 10%, but these may carry obscure risks, particularly for those specialising in the mystical world of collateralised loans. 

The Invesco Bond Income Plus (LSE: BIPS) trust yields a lower but still healthy 6.7% from a “very liquid” portfolio of listed bonds. Thanks to an average bond price of 92 and a weighted average bond maturity of 6.6 years, the redemption yield of the portfolio is 8%, which rises to 9% with the benefit of borrowings amounting to 14% of net assets. This is achieved through “repo” borrowing against individual bond holdings at an effective interest rate of around 4%. 

With total fund costs of just 0.9%, including a management fee of 0.65%, this means that the dividend is fully covered. There “should be a bit of capital growth but income is not likely to rise much”, says lead manager Rhys Davies. Nearly 70% of the portfolio is sub-investment grade, which implies high risk but default rates are low (below 4% on high yield, according to credit-rating agency Moody’s) and unlikely to rise significantly. Besides, “defaults can be an opportunity to restructure”, says Davies, who adds that he sometimes acquires holdings of companies already in default to benefit from a recovery in value. 

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About half the portfolio is in the UK, 10% in the US and most of the rest in Europe. “UK insolvency laws are pretty good, so many European companies come to the UK for bond listings.” 38% of the portfolio is in corporate high-yield bonds, 33% in subordinated financials, “often investment grade and providing good income but with less protection if things go wrong, as it is the most junior of bank debt”.

Higher-quality “defensive” holdings and “hybrids”, such as bonds convertible into shares, plus a little emerging-markets exposure, make up the rest.

Healthy yields from Invesco Bond Income Plus

The trust was formed by the merger in 2021 of two sub-scale high-yield funds, resulting in lower costs, better liquidity and wider appeal for the shares. Consequently, the shares have traded at a small premium to net asset value (NAV) since late 2022, which has enabled more than £30 million of additional share issuance in the last year. This brings the market value of BIPS to £330 million, the largest in the sector. Davies also manages £2 billion in Invesco’s Monthly Income Plus fund and £2 billion in a segregated mandate. He is part of an extensive team that comprises 13 fund managers, 19 analysts and eight dealers providing reassurance about the resources, experience and knowledge available to Davies and co-manager Edward Craven. Davies is clearly a cautious investor. Yields, he says, “remain relatively high, providing compensation for rate risk and credit risk”. The fund has performed well in the last year, returning 13%, but the three-year return of just 4% carries the scars of higher interest rates. Despite the last year, “there are lots of interesting and exciting bonds around to put into the portfolio”. 

“Interesting” and “exciting” are not words usually associated with bond investing, nor are they features normally sought by investors in bond funds. The portfolio turnover of about a third each year seems high but shows the team’s willingness to take profits as bonds approach maturity and better investment opportunities appear. What is particularly impressive is that the 18% fall in the share price, excluding dividends, in the year to 30 September 2022 as interest rates in the UK and US rose from near zero to over 5%, was fully recovered by the end of 2023 and the share price is now at an all-time peak despite, as yet, no fall in rates. Better yields may be available elsewhere for fixed-income investors but the ride is unlikely to be as easy as with BIPS.

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