Group's bond heads Read and Causer beginning to put money into markets again after adopting low-risk position
Invesco Perpetual's Paul Read and Paul Causer believe credit markets are offering some value again after adopting their lowest-risk position in several years before the summer.
However, while the pair said wider spreads are providing opportunities, they are not expecting a quick snap back in these markets.
Read said Moody's expects the default rate to rise to 4% next year and 5% in 2009, and credit market stresses can be expected to continue for several more months.
"While we can expect central banks to try to help markets to function, we should not expect them to bail out financial markets with aggressive interest rate cuts," he added.
"A longer-term issue is the extent to which the current market problems lead to slower economic growth and reduce inflationary pressures. Those factors will determine whether the recent fall in Government bond yields - which has largely represented a flight to quality - is justified."
Read and Causer have been arguing for several years that fixed-income markets were expensive and credit was too tightly priced.
Their portfolios have reflected this view, with higher-risk assets reduced in the run-up to summer turbulence.
"It has been our view for more than two years that fixed-interest markets were not properly pricing in risk," added Read.
"We have encouraged investors to manage their expectations, emphasising the bulk of returns were likely to come from coupon income, not capital gain.
"In recent years, the financial world has invented many new fixed-interest funds. Some of these, even though they obtained high credit ratings, were, in our view, rather opaque with regard to their underly-ing risks."
The only financial engineering Read and Causer have engaged in within the fixed-interest range was to restructure a leveraged investment trust in May 2004, which actually reduced the level.
In Invesco Perpetual Monthly Income Plus, around 40% was in cash and investment-grade debt going into summer.
At the end of June, their Corporate Bond fund had 8.5% in cash and 4.5% in gilts.
"We think that the widening of credit spreads we have noticed recently means value is beginning to be seen in the credit markets and we are putting money into the credit market," added Read.
Recent purchases have included GE Capital, where they have been buying AA+ subordinated bonds, and Ford, whose long-term debt trades at 75 cents on the dollar and yields over 10%.