In this very challenging time, an update from the Company’s portfolio manager is set out below.
The Company’s closed ended structure means the Manager does not have to realise investments in these volatile markets to meet redemptions. It also enables the Manager to utilise borrowings to take advantage of opportunities to purchase bonds at attractive prices and enhance income as and when they present themselves. Furthermore, the Company has material revenue reserves available to support the payment of the quarterly dividend. The Company’s dividend policy remains unchanged and, whilst the Board is closely monitoring developments throughout this crisis, it remains confident that the portfolio is in good hands.
Rhys Davies, Portfolio Manager, commented:
“The rapid spread of the coronavirus outbreak has sadly impacted many lives and will impact many more over the coming months. This sobering prospect is paramount in my thoughts. As a portfolio manager I must, however, consider the economic and market impact of the virus, and how best to position Invesco Enhanced Income Limited (IPE).
As of the date of this release, high yield bond markets appear dysfunctional. We are observing widespread selling and at times there are very few buyers, which creates immense downward pressure on bond prices. Cash is king and those that can invest are able to name their price. We have not witnessed markets like this since the financial crisis.
Shareholders in the Company have experienced a decline in the share price that extends far beyond the movement in the Company’s NAV. Thankfully, IPE entered this crisis on a relatively strong footing. The portfolio was cautiously positioned by the end of 2019, which was a natural response to yields having fallen so much and our sober view on valuations. At the very early stages of the virus outbreak I raised cash in the portfolio significantly. As the crisis developed, I also put a hedge in place via a credit default swap. This defensive stance has meaningfully reduced the impact of market volatility on the Company’s NAV and leaves the Company with a solid base from which to invest.
The portfolio is well diversified and has always maintained exposure to well over 100 different companies. It is my belief that such diversification of credit risk is essential in a portfolio that is focussed on high yield bonds. These are unprecedented times and it is not clear how the default environment will evolve but a diversified portfolio will leave the Company in a strong position to cope.
Finally, the portfolio has been constructed with a bottom-up approach, based on individual company selection. Invesco has a team of highly experienced credit analysts whose job it is to navigate credit markets in both good times and bad.
The global policy responses announced so far are astounding but markets remain rightly focussed on the economic impact that the virus will inflict. High yield bond markets have repriced to reflect the severe economic shock that we can expect, but a lack of market liquidity has undoubtedly exacerbated price moves. Such dislocation between prices today and longer-term value is already creating very attractive opportunities for the Company. Whilst maintaining a prudent level of cash I am slowly and cautiously starting to add positions to the portfolio, buying bonds from companies that we believe have a balance sheet and business profile that can survive even a severe economic disruption. These attractive purchases at low prices will increase the Company’s income beyond its pre-crisis level, to the benefit of dividend cover.
It is important that I, and indeed shareholders, take a longer-term view beyond the current volatility in markets. We do not know when there will be a positive development around the virus, but in the meantime the Company contains a diversified portfolio of bonds that produce an attractive level of income for shareholders.
I would like to wish all shareholders and readers of this note good health at this worrying time and to reassure you that our long established and successful investment process ensures that we are well equipped to manage the portfolio through the current uncertainty."
- 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
- For more information on our products, please refer to the relevant Key Information Document (KID), Alternative Investment Fund Managers Directive document (AIFMD), and the latest Annual or Half-Yearly Financial Reports.