While the turbulent developments in fixed interest markets last year created new uncertainties, as Paul Read co-head of fixed interest at Invesco Perpetual explains, they have also raised interesting opportunities for 2008.
"We believe better opportunities in fixed income markets in 2008 are likely to come from the higher yields which are available from credit markets. The general pattern last year was for spreads to widen from July onwards, reflecting increased concern in credit markets - although the specific reason at that time was less clear. Certainly the problems in the US sub-prime markets and the high-profile collapse of two Bear Stearns funds were important factors. But, outside the housing and financial sectors, corporate issuers remained in a generally strong financial position, with default rates remaining low.
Throughout the autumn it became clearer that the problems in credit markets could endure. There was further evidence of forced selling in a market that was beginning to cut leverage while the effects of the credit crunch were being felt in the banking and wider financial sectors. Credit markets weakened and safe haven assets rallied.
The greater differentiation between the pricing of different credit risks is something we welcome. It comes after a period in which credit availability had been relatively easy and there was little discrimination between different issuers."
Together Paul Read and Paul Causer have managed the Invesco Perpetual Corporate Bond fund since its launch in July 1995. Aiming to achieve a high level of overall return, with relative security of capital, the fund invests in a portfolio of predominantly investment grade corporate bonds, and offers the flexibility to invest in government and high yield bonds.
The changing backdrop
The fund management team's truly active investment approach enables them to pursue opportunities across the credit risk spectrum and rise to the challenge of a constantly changing market backdrop.
"Our credit exposure has changed quite substantially over time, as our views on the relative attractiveness of different sectors of the market have changed. We believe that the environment during 2008 will be one where an approach of careful credit selection and active fund management will be required."
It is an approach that has proved successful for the Citywire A-rated partnership. The Invesco Corporate Bond fund has generated a consistent, strong long-term track record, achieving first quartile performance against its peer group - the IMA UK Corporate Bond sector - over one, three, five and 10 years.
Awareness of risk
Read adds: "Naturally, investors should be aware of the risks: the general economic environment appears less favourable; the default rate is expected to rise; and yield spreads have widened. We are aware of these risks and that selecting the right timing for an increase in exposure to the credit markets is always difficult. In that context, we think the best approach is to rebuild credit exposure over time, drawing down holdings of cash and government bonds.
Overall, we believe that we are starting to see better value in parts of the corporate bond and high yield markets. Although wider spreads between corporate and government bonds are providing better value, we do not think that we will see a quick snap back in these markets. Rather, we expect it will be an opportunity, over a period of months, for portfolios to be rebuilt with investments that will provide income and total return over the medium term."
