In light of recent unprecedented global market events, the Board and the Manager wish to provide an update to shareholders on activity within the portfolio.
The Board notes that there is significant cash within the portfolio and that it is confident the Manager is in a strong position to take advantage of opportunities within the high yield market. The Board confirms that its dividend policy remains unchanged and that it will continue to monitor market developments closely.
Rhys Davies 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 the Company’s portfolio.
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, the Company 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.