Broadening your investment universe to include both bonds and equities can help to maximise the income opportunities available.
One of the most important decisions when taking such an approach is how much to allocate to each asset class. For investors who prefer to leave such considerations to an expert fund manager, mixed asset funds can provide an interesting option.
Here at Invesco, we have a long and successful history of investing in mixed asset funds. The first was launched into the UK market in 1999. The successful formula has since been applied to several other strategies with differing equity allocations. The Invesco Pan European High Income Fund builds on this track record seeking to provide investors with a balance of income and capital growth over the long-term.
The very strong performance of financial markets since the pandemic began in February 2020 has significantly reduced the income available within bond markets. Data from ICE BofA for example show that European Currency High Yield bond yields reached a record low of 3.22% at the end of February. For context, at the height of the pandemic in March yields for this area of the market reached a peak of 7.05%.
However, while the absolute level of income available has fallen, there are still opportunities. This year we have been able to add quite a number of new bonds in instances where we’ve liked the issuer and thought the coupons were attractive.
For the strongest issuers, coupons on senior bonds are pretty low, but some also issue more junior debt and offer higher yields as a result.
Although the absolute levels of yields remain low, this year has also seen a rise in German government bond (Bund) yields to become. The rise has been greatest for longer dated bonds resulting in a steepening of the yield curve.
This rise is particularly relevant for banks. Less negative yields and steeper yield curves are good for banks. The stimulus that is flowing into the economy is also positive as it should reduce non-performing loans as well as raising overall economic activity and so earnings.
In our view this positive backdrop, provides an opportunity. We’ve been applying our extensive experience in this sector over recent months to capture income from banks that have been issuing subordinated bonds with relatively attractive coupons.
The focus on income of our mixed-asset funds means that bond exposure is predominantly tilted toward corporate bonds, typically high yield and higher yielding investment grade.
Lewis Aubrey-Johnson discusses how the Invesco Pan European High Income Fund is benefitting from its equity holdings.
