Case study: Invesco Bond Income Plus (BIPS)

Company: Invesco Fund Managers Limited

Launched: Formed in 2021 through the merger of Invesco Enhanced Income and City Merchants High Yield Limited

Manager: Rhys Davies and Edward Craven

Ongoing charges: 0.86% including annual management fee (as at 31/01/2023, Source: Invesco factsheet)

Dividend policy: Target annual dividend of 11.5p per share. This is a target and there is no guarantee the dividend will be paid

Benchmark: The company does not have a benchmark

One investment company that aims to provide income to investors is Invesco Bond Income Plus (BIPS). BIPS invests primarily in high-yielding fixed-interest securities, with the goal of providing a mix of capital growth and income to shareholders.

The company was formed through the merger of the Invesco Enhanced Income and City Merchants High Yield Limited in 2021. BIPS continued to pay a dividend during the pandemic and, once the merger was complete, the company’s management team confirmed it would target an 11p per share annual dividend for the following three years. In the third quarter of 2022 the board decided to increase this target to 11.5p per share per year, paid quarterly.

The BIPS portfolio is made up of typically higher-yielding corporate bonds and financial debt instruments. BIPS also holds a small number of bonds that have come under price pressure but where the portfolio managers believe the companies are capable of turning around their businesses.

Risk is obviously a major consideration in the high yield bond market and BIPS portfolio managers Rhys Davies and Edward Craven try to mitigate this using their skill, experience, and judgement to diversify the portfolio. It’s not uncommon for the portfolio to hold over 100 companies, meaning a single bond issuer defaulting will not by itself lead to a large loss of NAV.

High yield bonds of the sort held by BIPS are typically harder for retail investors to evaluate and invest in by themselves. Anyone looking to gain some exposure to the corporate bond market may want to consider doing so via an investment company like BIPS as a result.

1. What is the company’s goal?

Invesco Bond Income Plus aims to produce capital gains and income for investors by investing in a diverse portfolio of high yield bonds and other fixed interest securities.

2. What kind of bonds do the managers like?

Portfolio managers Rhys Davies and Edward Craven, supported by their team, typically invest in a diversified portfolio of bonds issued by large and medium-sized businesses across the sectors of the economy, both corporates and financials. They are also happy, to a limited degree, to invest in bonds which have experienced substantial price pressure but only if they believe there is a strong enough case for a turnaround.

3. Are investment decisions driven by a particular investment style?

Fixed income brings with it credit risk and the possibility that issuers will default, more so in high yield bonds. Reducing the likelihood this will happen is a big part of the decision-making process at BIPS as a result. The company aims to hold bonds issued by companies the team know well, where they have confidence in their ability to service their debt. It also means holding a diversified portfolio of bonds, to potentially reduce any downside risk.

4. How many bonds does the company typically hold?

In line with those efforts to offer sufficient diversification, the company typically holds a diversified portfolio of around 200 individual fixed income securities. This number is not fixed and can change.

5. What is the company’s dividend policy?

After BIPS was formed from the merger of Invesco Enhanced Income and City Merchants High Yield Limited , management said it would target an 11p per share dividend for the following three years. In the third quarter of 2022, the board decided to increase the target dividend to 11.5p per share per year. Assuming it meets that target, the dividend will be paid out via four 2.875p per share dividends, issued on a quarterly basis. The company typically pays dividends from income it receives but may use capital and revenue reserves to pay shareholders if it experiences a shortfall. Please note as dividend policies and future dividend payments are determined by the board, they are not guaranteed.

6. What are the company’s ongoing charges?

The company’s ongoing charges are 0.86% at the time of publication, with an annual management fee of 0.65%. Note that this can change over time.

7. Does the company have performance fees?

The company does not have performance fees. The portfolio managers are invested in the company, so their interests are aligned to shareholders.

8. How much attention do the portfolio managers pay to their benchmark, and to what extent are absolute returns important?

Unlike most investment trusts, BIPS does not run against a benchmark, nor do the positions it takes reflect one. The portfolio managers do look at the BofA Merrill Lynch European Currency High Yield Index as a way of gauging their performance but the index is also not reflective of the positions BIPS takes. Rather than obsessing over their performance relative to a benchmark, the BIPS team are focused on achieving the company’s stated goals – delivering a high level of income and capital growth to shareholders.

9. Does the company use gearing and if so is it structural or opportunity led?

The company uses gearing, when appropriate, to potentially enhance the income it generates. Levels of gearing tend to fluctuate as a result. The company uses gearing by means of repo financing.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When making an investment in an investment trust/company you are buying shares in a company that is listed on a stock exchange. The price of the shares will be determined by supply and demand. Consequently, the share price of an investment trust/company may be higher or lower than the underlying net asset value of the investments in its portfolio and there can be no certainty that there will be liquidity in the shares.

Invesco Bond Income Plus has a significant proportion of high-yielding bonds, which are of lower credit quality and may result in large fluctuations in the NAV of the product.

The product uses derivatives for efficient portfolio management which may result in increased volatility in the NAV.

The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.

The product may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events.