Article

Implementation – Relative Value

April 8, 2021
Lyndon Man
Lyndon Man
Fund Manager
Invesco Global Investment Grade Corporate Bond Strategy
Invesco Global Investment Grade Corporate Bond Strategy

The team note that they cannot correctly call the top and bottom of market cycles and for a portfolio manager to rely on achieving this to generate performance is a higher-risk strategy as ultimately ‘‘markets can remain irrational longer than you can remain solvent’’[1]. Therefore, the team believes that the way in which they construct their investment themes enables the Strategy to outperform the corporate bond market over the medium to long term regardless of the direction of the underlying corporate bond market. This is key to their approach.

This implementation process is designed to isolate relative value opportunities within corporate bond markets globally by positioning versus benchmark, with an overweight to the area of the market the investment team favours and an underweight, of equal measure, to the area of the market that the investment team believes is less attractive. One important detail is that the overweight leg of each investment theme is equal to the underweight leg in terms of price sensitivity versus the benchmark. This has the ability to remove the directionality of the market so that the Strategy can potentially outperform more consistently through cycles. The team also believes this reduces tracking error, and therefore improves risk-adjusted returns.

Sizing of these positions is modulated based on the level of conviction held, which is again driven by the investment themes. For instance, if several of the investment themes suggest the same area of the market is likely to outperform, a higher level of conviction is likely to lead to a larger position size, depending on the opportunity set.

The Strategy is benchmark aware and uses various risks measures to ensure the balance between risk and reward is optimal. Specifically, when constructing the funds, the team use a combination of measures including tracking error, duration times spread, price volatility, interest rate sensitivity and return correlation when implementing the relative value positioning across the thematic risk factors.

Related insights

  • 1 Quote attributed to John Maynard Keynes.

  • 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.

    Debt instruments are exposed to credit risk which is the ability of the borrower to repay the interest and capital on the redemption date. The strategy may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of a portfolio. The Manager, however, will ensure that the use of derivatives does not materially alter the overall risk profile of the strategy. Investments in debt instruments which are of lower credit quality may result in large fluctuations in value.

    As this strategy is invested in a particular sector, you should be prepared to accept greater fluctuations of the value than for a strategy with a broader investment mandate.

    Changes in interest rates will result in fluctuations in value.

    The strategy may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events.

    Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.

  • Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.

    This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.