Invesco Monthly Income Plus's Paul Causer: why investors can still sleep at night, September 2019

Invesco Monthly Income Plus is Invesco's flagship fixed income fund and has been on the Chelsea Selection for many years. Its investors use the yield it produces as part of their regular income – so it's the part of the fund's returns that co-manager Paul Causer is most focused on.

When Paul came to Chelsea's offices for an investment catch up in September, he talked to us about 20 years managing the fund and gave his views on central bank policy, Brexit, and a possible Corbyn government.

Paul, you will soon mark 20 years managing Invesco Monthly Income Plus - that's a long time in the same job! What do you like so much about running a strategic bond fund?

“The fund was actually launched before there was even a strategic bond sector and its main aim is producing the yield - our customers use the income this fund produces to live on, so it's really important we get it right.

“I like the challenge of putting together an optimised group of assets to achieve a higher than average yield in an evolving backdrop – all whilst keeping risk at a reasonable level and generating a bit of capital growth. And I like the fund's hybrid approach [it invests up to 20% in equities as well as bonds]: it is really important to have multiple elements as they get you thinking about the full capital structure of any one company and valuing the different combinations. It allows you to look at a company with two completely different approaches.” 

Could you give us some examples of highs and lows in the past 20 years and what you have learned?

“The industry focuses very much on the moment, and projects it into the future. I've learned that you need to remember to be open minded when it is all doom and gloom, but also when everything is good - you need to be realistic and look through the emotion.

“The high for me was coming out of the financial crisis – having not only survived it but with the fund having been strong. The low was the financial crisis itself. The worst part was the unknown elements of it all.”

What is your take on central bank policy at the moment? Where do you see bond markets going from here?

“There are certainly issues with the risk/reward trade-off at the moment in bonds. 2018 saw a period of normalisation for monetary policy: yields were gliding higher and we were seeing some decent moves [in interest rates]. However, the beginning of a synchronised global slowdown then came about and markets panicked at the end of 2018.

“There is an element of global slowdown - particularly in manufacturing - but there is more political noise. Markets are full of risk and full of doubt. Central banks will be the only game in town for the rest of this year and into next year in my view. The only thing that could upset this is if we see a sharp leg down in global growth, which will cause concerns for riskier areas. Without this, it will be OK to sleep at night due to central bank support.”

If the UK slips into recession, what impact might this have on bonds?

“In this scenario, I think interest rates would be cut and may even go negative. The Bank of England could also reinstate quantitative easing.

“If it is just a downturn due to Brexit, there could be risk adjustments on things such as banks, with everything 'UK domestic' taking some movement. But the market is not stupid and will buy value when it exists.

“The currency is key. It was oversold around 'No Deal' concerns. We have seen how much it moves up when these come off.

“What worries me more is the result of an election. A Corbyn government could make yields go up (a 1% increase in interest rates leads to a 21% capital loss on 30 year gilts - like an iceberg, two-thirds of the risk is under the water/can't be seen) and the pound could take a bigger hit than under a No Deal scenario. Policy uncertainty could also drive away foreign investors.

“However, yields can’t go too far just because there is such little value around the world, so investors will come back in at some level. The market is quite self-correcting. As such, we are not too worried about a downturn.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Paul's views are his own and do not constitute financial advice.

Published on 23/09/2019