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Invesco Pan European High Income Fund
Lewis Aubrey-Johnson
This presentation is for Professional Clients in Brussels only and is not for consumer use.
Please do not redistribute. Product Director, Fixed Interest
26 February 2014
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Impact of declining ‘safe’ income
2
Market Market size Dec 2007 ($trn)
Rate Dec 2007
Market size now ($trn)
Rate now
Change in income* ($bn)
US Deposits 6.7 4.38% 9.4 0.10% -287bn
US Money Funds 3.1 3.24% 2.7 0.07% -98bn
US Treasury Bills 0.5 3.19% 1.1 0.06% -16bn
US Govt Bonds 1-5 yrs 1.2
3.16% 3.9 0.72% -29bn
Eurozone Deposits 4.6 4.38% 5.0 0.28% -187bn
Eurozone Govt Bonds 1-5 yrs 2.1
4.10% 2.9 0.98% -65bn
UK Deposits 1.2 5.70% 2.1 0.48% -62bn
UK Govt Bonds 1-5 yrs 0.2 4.40% 0.5 1.10% -6bn
Source: Government bonds and bills, Barclays, 31 December 2013. US Money Funds, ICI.org, 31 December 2013. US Deposits, Federal Deposit Insurance Corporation, 30 June 2013. UK Deposits, Bloomberg, 30 November 2013. Eurozone Deposits, Bloomberg, 30 November 2013. *Lost income is calculated as end-2007 assets x change in rate.
$750bn less per annum income from these assets since Dec 2007
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Investors have been forced to take more risk
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-200
-100
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sep 0
8
nov 0
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jan 0
9
mrt
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mei 09
jul 09
sep 0
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nov 0
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jan 1
0
mrt
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mei 10
jul 10
sep 1
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nov 1
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jan 1
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mrt
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mei 11
jul 11
sep 1
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nov 1
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jan 1
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mrt
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mei 12
jul 12
sep 1
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nov 1
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jan 1
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mrt
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mei 13
jul 13
sep 1
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nov 1
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Source: Lipper FM. Data to end November 2013. Estimated net inflows of European domiciled pure fixed income funds. Excludes money market, money market enhanced funds and mixed asset funds. Estimates based on change in AUM and performance month on month.
Cumulative inflows into European domiciled bond funds (€bn)
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dec 1
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A BBB
Leading to lower yields Euro investment grade
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jun 1
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A BBB
Merrill Lynch Index yield (%)
Source: Bloomberg, Merrill Lynch as at 31 January 2014.
Merrill Lynch Index spread (bps)
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Leading to lower yields Euro high yield
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dec 1
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jun 1
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dec 1
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jun 1
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BB B
Merrill Lynch Euro High Yield Index yield (%)
Source: Bloomberg, Merrill Lynch as at 31 January 2014.
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dec 1
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jun 1
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dec 1
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jun 1
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BB B
Merrill Lynch Euro High Yield Index spreads (bps)
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And yields may well stay low
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dec 0
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aug 0
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dec 0
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aug 1
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dec 1
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aug 1
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dec 1
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apr
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aug 1
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dec 1
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aug 1
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dec 1
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EU UK US
Headline CPI YoY (%)
Source: Bloomberg. Data to 31 December 2013.
-8
-6
-4
-2
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dec 0
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apr
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aug 0
9
dec 0
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apr
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aug 1
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dec 1
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apr
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aug 1
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dec 1
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Italy Spain France Portugal Ireland
Headline CPI YoY (%)
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Bund yields may well stay low
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Source: Goldman Sachs. Data to September 2013 (latest available).
Chart title
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%,
yo
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%,
yo
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GDP (real, left scale) Loan growth to the private sector (real)
Loan growth to private sector in Continental Europe still shrinking
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Early signs of weaker credit quality in investment grade
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Source: Left hand chart, Morgan Stanley Research, Bloomberg, company data to September 2013 (latest available). Right hand chart, JPM Credit Strategy, 8 November 2013.
1,0x
1,5x
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dec 9
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dec 0
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dec 0
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dec 0
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dec 1
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Gross Leverage Net Leverage
European IG Issuer Leverage
Euro new issues - weaker ratings, longer dated
2009 2013
BBB & unrated 33% 54%
10yr + 17% 31%
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Growing signs of weaker credit quality in high yield
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1,0x
1,5x
2,0x
2,5x
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3,5x
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Gross Leverage Net Leverage
European HY Issuer Leverage
Source: Left hand chart, Morgan Stanley Research, Bloomberg, company data to September 2013 (latest available). Right hand chart, JPM Credit Strategy, 8 November 2013.
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2006 2007 2008 2009 2010 2011 2012 2013
Euro high yield new issue leverage (x)
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Growing signs of weaker credit quality in high yield High yield
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2006 2007 2008 2009 2010 2011 2012 2013
% of Euro high yield supply rated ‘B’ or below
Source: JPM Credit Strategy, 8 November 2013.
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dec 07 dec 08 dec 09 dec 10 dec 11 dec 12 dec 13
% of Euro high yield supply for dividend and LBO
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Invesco Pan European High Income Fund Key features
An actively managed fixed income fund
And can allocate up to 30% in equities
Uses high yield and higher yielding investment grade for income and government bonds for relative security
Asset allocation and fixed income managed by Paul Read and Paul Causer, equities managed by Stephanie Butcher (member of the European equities team)
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400
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dec 1
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jan 1
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aug 1
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Liquidity IG HY Equity
Invesco Pan European High Income Fund We actively manage the fund – Year 2011
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Spread of ML European High Yield Index
Source: Left hand chart: Merrill Lynch, Bloomberg. Right hand chart: Invesco. Liquidity comprises cash and investment grade goverment bonds. Portfolio characteristics are subject to change without notice. Data to 31 December 2011.
Positioning of fund
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Liquidity IG HY Equity
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Invesco Pan European High Income Fund We actively manage the fund – Year 2012
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Spread of ML European High Yield Index
Left hand chart: Merrill Lynch, Bloomberg. Right hand chart: Invesco. Liquidity comprises cash and investment grade goverment bonds. Portfolio characteristics are subject to change without notice. Data to 31 December 2012.
Positioning of fund
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Liquidity IG HY Equity
Invesco Pan European High Income Fund We actively manage the fund – 2013
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mrt
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Spread of ML European High Yield Index
Left hand chart: Merrill Lynch, Bloomberg. Right hand chart: Invesco. Liquidity comprises cash and investment grade goverment bonds. Portfolio characteristics are subject to change without notice. Data to 31 December 2013.
Positioning of fund
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Invesco Pan European High Income Fund Portfolio features
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31 Jan 12 31 Jan 13 31 Jan 14
Liquidity 17.3% 33.7% 27.7%
Cash 17.1% 17.1% 18.5%
Government bonds 0.0% 16.0% 7.3%
Bonds maturing within 1 year 0.2% 0.7% 1.9%
Defensive 2.8% 2.3% 8.4%
Investment grade (ex subordinated insurance) 1.8% 0.1% 6.1%
Covered & senior banks 1.0% 2.2% 2.3%
Low duration income 74.9% 47.3% 46.2%
Bank subordinated debt 24.3% 14.5% 15.8%
Corporate high yield (inc factored & emerging markets) 33.0% 18.5% 13.6%
Hybrids, convertibles & subordinated insurers 17.6% 14.2% 16.8%
Equities 4.7% 16.7% 17.7%
Source: Invesco as at 31 January 2014. Excludes derivatives. Bonds with less than a year to maturity are excluded from other categories to prevent double counting.
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Examples of opportunities – subordinated financials
Lloyds ECN €6.439% coupon 2020, 5.3%* yield
SocGen $7.875% coupon 2023, 7.5%** yield
Barclays €4.75% coupon 2020, 5.4%*** yield
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Source: Invesco, Bloomberg 31 January 2014. *Yield to maturity.**Yield to call. ***Yield in perpetuity. There is no guarantee that Invesco will hold these securities within its funds in the future. This is not investment advice for buying / holding / selling shares of the above mentioned companies.
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Examples of opportunities – corporate hybrids
Telefonica €7.625%, BB+, 2021 call, 6.1% yield
KPN £6.875%, BB, 2020 call, 6.2% yield
Enel €6.5%, BB+, 2019 call, 5.1% yield
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Source: Invesco, Bloomberg 31 January 2014. Yields are to call. There is no guarantee that Invesco will hold these securities within its funds in the future. This is not investment advice for buying / holding / selling shares of the above mentioned companies.
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The equity portion of the Invesco Pan European High Income Fund
We are overweight:
The periphery1
Financials2
We are underweight:
France, Germany and Sweden3
Consumer Staples4
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Source: Invesco as at 31 December 2013. Relative to MSCI Europe ex UK and refers to equity portion of the Invesco Pan European High Income Fund. 1Peripheral countries include Greece, Ireland, Italy, Portugal and Spain. 2Financials based on Sector Level 1 GICS classification. 3These are our three largest active underweight positions. 4Consumer Staples based on Sector Level 1 GICS classification. Portfolio characteristics are subject to change without notice.
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Invesco Pan European High Income Fund Performance (A share class %)
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Cumulative returns, % YTD 1 year 3 years 5 years Since launch (28 Dec 2007)
Invesco Pan European High Income Fund 0.84 12.64 37.32 159.55 79.60
Mstar GIFS EUR Cautious Allocation 0.06 2.62 7.31 20.99 12.36
Rank 7/81 1/79 1/75 1/64 1/50
Quartile 1 1 1 1 1
Annualised returns, %
Invesco Pan European High Income Fund n/a n/a 11.2 21.0 10.1
Mstar GIFS EUR Cautious Allocation n/a n/a 2.4 3.9 1.9
Source: Morningstar ©2014. All rights reserved as at 31 January 2014. Fund and sector performance figures are shown in euros on a mid-to-mid basis, inclusive of gross reinvested income and net of the annual management charge and all other fund expenses. The figures do not reflect the entry charge paid by individual investors.
Calendar year returns, % 2008 2009 2010 2011 2012 2013
Invesco Pan European High Income Fund -30.3 61.6 13.7 -3.0 27.0 12.7
Mstar GIFS EUR Cautious Allocation -9.2 9.6 3.9 -2.7 6.6 2.0
Quartile 4 1 1 3 1 1
Past performance is not a guide to future returns.
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Conclusions
Corporate markets have little upside in our view
Supply is starting to deteriorate
We can find relative value (sub financials/hybrids)
We have increased exposure to equities
We have lots of liquidity and will be patient
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Source: Invesco as at 15 January 2014.
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Important information
This presentation is for Professional Clients in Brussels only and is not for consumer use. Please do not redistribute.
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.
Past performance is not a guide to future returns.
Where Lewis Aubrey-Johnson has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell.
Debt instruments are exposed to credit risk which is the ability of the borrower to repay the interest and capital on the redemption date.
Changes in interest rates will result in fluctuations in the value of the Invesco Pan European High Income Fund. The Invesco Pan European High Income Fund may hold a significant amount of debt instruments which are of lower credit quality and may result in large fluctuations of the value of the fund.
The distribution and the offering of the Invesco Pan European High Income Fund in certain jurisdictions may be restricted by law. Persons into whose possession this document may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
Persons interested in acquiring the Invesco Pan European High Income Fund should inform themselves as to (i) the legal requirements in the countries of their nationality, residence, ordinary residence or domicile; (ii) any foreign exchange controls and (iii) any relevant tax consequences.
The Invesco Pan European High Income Fund is available only in jurisdictions where its promotion and sale is permitted.
Please refer to the most up to date relevant fund and share class-specific Key Investor Information Document for more information on our funds. Further information on our products is available using the contact details shown.
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Invesco Asset Management S.A. Belgian Branch (France) situé Avenue Louise 235 - 1050 Bruxelles, Belgique.
