In a statement given exclusively to Wealth Manager earlier this month, Invesco Perpetual said it is ‘confident’ the pair (pictured) can continue to manage the fund effectively despite its massive size and low levels of liquidity in the corporate bond market.
A Fitch survey last week found that two thirds of fixed income managers said the lack of liquidity was affecting their market behaviour.
Indeed, the Financial Services Authority’s (FSA) concerns were sufficient to prompt it to write a letter to asset managers in July to check they can meet redemptions.
What really brought the issue home to most investors was M&G’s announcement last month that it will try to stem inflows into its £6.31 billion Corporate Bond and £5.16 billion Strategic Corporate Bond funds as manager Richard Woolnough is finding it increasingly difficult to implement his investment style. This has prompted a number of investors to look for smaller alternative funds for their fixed income exposure.
'No plans to soft close'
All eyes also naturally turned to Causer and Read’s fund, being the next largest fund in the Investment Management Association’s sterling corporate bond sector, but Invesco Perpetual has confirmed it is happy to keep taking in more money.
‘We have no plans to “soft close” or otherwise to restrict flows into the Invesco Perpetual Corporate Bond fund,’ a spokesman said.
‘We are confident we can continue to manage this fund effectively and have achieved strong performance with large funds as well as smaller funds.’
Stressing that the group constantly monitors fund size, liquidity and their effect on its investment strategy, he added: ‘Currently, in the context of our investment views and net client flows, we do not believe that the size of our larger funds inhibits our ability to produce strong relative performance.’
Investors may argue the fund’s size already has had an impact on performance. In the third quarter of last year, the fund took a sizeable 3.83% hit, leading Causer and Read to concede they had the ‘wrong portfolio’ for that period as financials sold off sharply. The fund is also now fourth quartile over one and three years and although many will blame this on stock selection – the fund has about 55% in financials – the fund’s size and liquidity have arguably compounded this.
‘Is there a problem with liquidity? Absolutely, yes, there is for everyone. Does it affect your investment style? Yes, depending on the size of your fund,’ said Phil Milburn, who runs the £1 billion Kames High Yield Bond fund. ‘If you are saying that you are happy with what you have got and want to remain invested in financials and peripheral European financial debt forever, then liquidity is not an issue.
‘But what happens when the facts change? What they are saying is quite sensible on a long-term view, but if they do not want to hold this until maturity they will need a magician’s wand to shift it.’
A case in point is a Santander security in Causer and Read’s top 10 holdings, which accounts for around 1.2% of the portfolio. Given the fund’s size, this equates to an exposure of more than £60 million, assuming it is trading around par. In the current market it is only changing hands in £1 million to £2 million trades at a time, meaning it would potentially take weeks should the pair wish to exit it.
Committed to financials
Causer and Read have said they are committed to financials in the long term, believing the sector is where the value lies in the market. Despite the volatility of returns the fund has endured, the managers retain considerable investor backing.
Over three years Invesco Perpetual Corporate Bond is up 23.2%, compared with a sector average of 26.4%, but its long-term track record remains strong, with the fund up 34% versus the peer group’s 26.9%.
‘I would not consider the size of the fund to be prohibitive given their investment approach,’ said Victoria Hasler, assistant director of fixed income at Brewin Dolphin.
‘Invesco do claim that they take a longer-term view and I’m sure would tell you that they are happy to hold these bonds to maturity. They make no secret of the fact they like financials and are overweight the sector. I think it’s a good thing that there are funds like this one and, at the other end of the scale, M&G, who take very different positions to the benchmark. It gives investors choice and the tools to express their views.’
City Asset Management analyst Denise Collins adds: ‘Investors are certainly worried about liquidity and fund sizes, but given the relationship we have with managers, the best way to navigate the concerns is through transparency and continuous discussion.
‘At least investors, fund managers and the FSA are highlighting this concern and are now having the right discussions, and I’m sure the introduction of sensible regulations in relation to liquidity management would be welcomed by most.’