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Reliable income is in short supply and is at the top of most investors’ wish list. Dividends from British companies fell another 27pc in the first three months of 2021, according to Link, a data firm. British stock market payouts have fallen 42pc since the pandemic began.
Bonds are more secure, but yields are low, the bonds expensive, and potential returns unappealing. However, some managers have dared venture into higher-yielding, riskier, names and have been rewarded.
The Invesco Monthly Income Plus fund beat its peers last year, generating 6.7pc in 2020. Rhys Davies, one of the three managers running the £2.3bn fund, tells Telegraph Money how he snapped up cheap bank bonds last year and why those opportunities have since dried up. He also explains why Virgin Media is arguably the best high-yield investment in Britain.
Who is the fund for?
It does what it says on the tin, so is ideal for anyone looking for regular income.
How do you pick bond issuers?
Credit analysis is at the core of what we do. Before we buy a bond – which is effectively lending to a company – we want to make sure it can pay the interest.
Were you worried firms would default during the pandemic?
At its height there was a lot of concern in “high-yield markets”, the riskiest businesses, and their ability to pay the interest, known as coupons. The response from central banks changed everything. Many “high-yield” companies benefited from government schemes such as furlough or tax breaks. My concern is that now a lot are left with more debt than before the pandemic.
Overall, the market crash in March 2020 created some good opportunities for us to buy bonds at cheaper prices.
Why have you bought so many bonds from banks?
A lot of national bank bonds fell in price significantly last year. We were able to pick up Lloyds and Barclays, for example, for a lot cheaper than they were previously.
“Subordinated bonds” from banks – which are riskier as they are less secure but pay higher yields – have been a core investment since the financial crisis in 2008. Back then it was about buying bonds at distressed prices on the basis that the banking system would recover. Roll forward 10 years and it is a different investment. They are in a much better place than they were.
Are there still good deals out there now?
The best opportunities were last year. Over the course of 2021, we have seen yields fall and prices rise. We are always willing to take a chance when a bond is at a fair price, but I have to be careful buying risky bonds just for the sake of yield. We are treading carefully at the moment. All the money from central banks will keep yields low.
Which companies are the riskiest?
There are obvious casualties impacted by social restrictions, such as airlines, travel, leisure, restaurants, and cinemas. We have to be very careful about investing there. We did have some bonds from companies that couldn’t pay and a handful had to go through some kind of restructure. We owned very small amounts of Hertz, which in the end is set to recover.
What has been your best investment?
One of the most satisfying was backing Ford’s jumbo $8bn (£5.7bn) bond deal in April last year.
The company had been downgraded to high yield and was burning around $800m of cash a week at the peak of its troubles, so they were in a tough position. It was a great example of the market naming its price. After a strong rally, we sold those bonds for a 28pc profit just two months later.
And your worst?
Abengoa bonds. This was a Spanish engineering construction company, which we first bought in 2010 and still owned in 2016 when it had to restructure. Abengoa was not the company investors had thought, and a large debt write-down was needed. We sold them in 2018 at a nearly 90pc loss, a very large loss for a high yield bond.
How are you paid and do you personally invest in the fund?
A salary and a bonus linked to the performance of the funds. I don’t need income right now, but invest my pension as the fund has a good track record.
What would you be if not a fund manager?
I love fish and diving, so I would have been a marine biologist.