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THE INVESTOR
THE INVESTOR CENTRE
T
he year drew to a close with absolute
valuations in the stock market still
bearing little relation to underlying
corporate fundamentals, while the lessons
of the nancial crisis and the destructive
power of excessive leverage remain
unheeded.This time it isn’t the banks
behind the build-up of leverage. Instead,
the current facilitator of the credit boom
is, broadly speaking, the corporate bond
market.Anchored against a mispriced
risk-free rate (the 10-year US Treasury
yield, a rate that has been badly distorted
by quantitative easing), cheap corporate
debt is again fuelling speculative activity
within a number of areas – property, private
equity, infrastructure and hedge funds – as
the scramble for yield by investors in a
low-return world continues.This recourse
to the bond market has seen record issuance
in high-yield debt and deteriorating levels
of protection within issues.This ramp-up
in non-investment grade debt could have
painful consequences should a credit event
hit and liquidity levels dry up. Our concern
is that the developed world has never been
as sensitive to a rise in interest rates as it
is today.The bulls argue that, with wage
in ation dead and de ation rather than
in ation occupying the thoughts of most
central banks in the developed world,
rates will remain at rock bottom levels for
the foreseeable future. But what if wage
in ation is not dead but simply sleeping?
J O HAMBRO
Joint manager:
UK & General Progressive
Cheap corporate debt again fuelling
speculative activity
This time it isn’t the
banks behind the
build-upof leverage
John Wood
T
he Invesco Perpetual Multi Asset team
believes an unconstrained approach
to sourcing return ideas, combined with
robust risk management, can help generate
positive total returns throughout the
market cycle.The o cial targets of the
fund are to achieve a gross return of three-
month sterling LIBOR plus 5%, with less
than half the volatility of global equities
(as measured by the MSCIWorld equity
index), on a rolling, three-year, annualised
basis.An unconstrained approach means
the team does not think about the world
as a set of asset classes, but has the
freedom to look for good investment ideas
across all asset types and geographies, an
approach it believes will provide consistent
diversi cation throughout the cycle and
against a constantly changing market
backdrop.At any time, the portfolio may
contain from ve to around 50 investment
ideas; however, typically the number will
be between 20 and 30.The fund will use
the full range of nancial instruments,
including derivatives, in seeking to deliver
a consistent, risk-adjusted return over
the long term.At the fund management
stage, the team adheres strictly to the
use of quantitative techniques, which
underpin its risk models, stress testing
and scenario testing.The fundamental
proposition is straightforward: to produce
a complementary blend of investment
ideas in a single, risk-managed portfolio in
pursuit of a clearly de ned target outcome.
INVESCO PERPETUAL
Multi Asset
Fund seeks a consistent, risk-adjusted
return over the long term
The teamdoes not
think about theworld
as a set of asset classes
All information correct as at 31 December 2014
R
ecent months have seen a general
weakening of global economic data and
falling in ation expectations, resulting in
the timing of interest rate hikes in the US
and UK being pushed out.The European
Central Bank has started implementing a
number of measures to try to stimulate the
eurozone, with limited success, and the
central bank remains under pressure to go
further.The past three months have been
a more challenging period for high-yield
bonds.The higher income of the asset class
relative to others helped to o set a negative
price performance which resulted from a
higher level of risk-aversion.There has been
some weakness in individual companies,
which has increased volatility. Given the
less favourable macro backdrop overall,
demand in the high-yield sector has eased
slightly, with bonds of higher quality and
higher interest rate sensitivity tending to
outperform.According to data fromMerrill
Lynch, European high-yield bonds achieved
a total return of 0.1% over the three
months to the end of November.There was
considerable variance within the sector with
BB-rated bonds returning 1.3% and CCC
and below returning -4.9%.
INVESCO PERPETUAL
Corporate Bond
Past three months have been
challenging for high-yield bonds
There has been some
weakness in individual
companies
Paul Read and Paul Causer
David Millar, Dave Jubb and
Richard Batty
