INVESCO PERPETUAL Monthly Income Plus Accumulation Units

Bond markets have rarely looked such good value. Financial institutions suffering through the credit crunch have sold bonds to raise cash, causing bond prices to plummet and yields to surge upwards. Despite this I believe the future looks bright.

The UK’s level of core inflation (which excludes food and energy prices) is low, currently around 1.5%. Food and energy prices drive the high inflation figures reported in the news. Normally interest rates would be raised to control inflation but food and energy are absorbing so much of people’s wealth this will automatically put the brakes on spending.

In our opinion interest rates will fall, not rise, providing wages do not increase excessively. This would be excellent news for corporate bonds, as prices tend to move higher when interest rates decline. If we are right, those who invest now should enjoy high yields with the potential for capital appreciation.

One of our favourite funds in this area is Invesco Perpetual Monthly Income Plus. We suggested this fund earlier in the year and we have no qualms about suggesting it again. It can move between different quality bonds (see explanation below) depending on where the managers, Paul Read and Paul Causer, see the best opportunities.

Currently they are finding excellent value in bonds issued by blue chip companies. Many have issued bonds paying much higher interest rates than usual to attract investors. For example, Barclays and Royal Bank of Scotland both recently issued bonds yielding more than 8.5%. Government gilts currently yield just 5.3%. The Invesco Perpetual team can increase the portfolio yield without significantly increasing long term capital risk, although the value of the fund can fall as well as rise.

Additionally up to 20% of the fund can be invested in shares. This component is managed by Neil Woodford, one of the top fund managers in the UK with a reputation of out performing in a variety of market conditions

In our opinion the outlook for bonds is the strongest for years. We believe there is currently a place for a bond fund in almost every investor’s portfolio and Invesco Perpetual Monthly Income Plus is a superb way to benefit long term.

A BRIEF GUIDE TO BONDS

When you buy a corporate bond, you are essentially lending a company money. In return you receive interest and at the end of the term, the loan should be repaid. This means that unlike shareholders, who actually own the company itself and so participate in its growth, all that concerns bondholders is that the company will have enough cash to repay the loan and service the debt.That said some companies will default so bonds are not a one way bet.

Bond funds buy and sell fixed interest securities on your behalf. Different types of bonds have different risk profiles. For instance UK government bonds (known as gilts) are very secure because they are quite simply guaranteed by the GoverNment and the UK is one of only two countries who have never defaulted. At the other end of the spectrum are companies that are viewed as less stable who issue ‘junk’ or non-investment grade bonds. As the risk of default is higher they need to pay more interest to attract investors.

Bond funds will buy and sell bonds which means that they will not necessarily hold each one for the full term. Between being issued and redeemed the market will determine a price which can rise and fall. At the moment we believe prices have fallen too far, creating a window of opportunity.

CORPORATE BONDS YIELDS - AN EXPLANATION

The terms used to describe yields have been changed. They no longer take into account the capital position of the bonds in the portfolio, but we believe this is still an important consideration.

The distribution yield gives an indication of the actual level of income you might receive over the next 12 months.

The underlying yield, by contrast, is a theoretical figure which also takes account of the way in which the charges are paid within the fund.

As the distribution yield is higher than the underlying yield it means that the fund is taking charges from capital rather than income. Taking charges from capital will reduce the capital growth potential when compared to funds which take their charges from income. However it is a common way of paying charges within corporate bond funds because it allows the fund to pay a higher level of income.

Both yield figures are based on a snapshot of the current portfolio, which over the course of the year will change, so they too will vary over time and are not guaranteed.

Invesco Perpetual Monthly Income Plus

Distribution Yield 7.8%
Underlying Yield 6.6%