Article | 24 January 2020 | Georgina Taylor, Fund Manager
Three years ago, we launched the Invesco Global Targeted Income Fund (UK). Our goal was simple: to offer our clients a consistent monthly income whilst preserving their capital. The search for yield without taking excessive risk is an ongoing challenge in a world of record-low interest rates.
The fund targets a gross income of 3.5% per annum above UK 3-month LIBOR1 over rolling, three-year periods and aims to achieve this with less than half the volatility of global equities over the same, rolling three-year periods. We aim to achieve this through investing in long-term investment ideas implemented through a broad range of asset types.
We believed then, as we do now, that traditional income opportunities within both equities and bonds can still be found. Quite a few equities, for example, have great yields, but arguably, the risks associated with them is higher. With our ‘ideas-based’ approach to income investing, we hoped to provide our clients with an income option that diversifies their broader portfolio. We aim to achieve this through generating income and capital growth by accessing a wide range of asset types, all combined into a single risk-adjusted portfolio.
The end of November 2019 marked the end of the first three-year period for our fund. The year of our launch (2016) was marked by two events that have continued to shape the news since: the Brexit referendum in the UK and the US elections that gave the world President Donald J. Trump. The investment landscape has changed quite significantly over the three-year time frame, from the Federal Reserve tightening US monetary policy back in 2016, to embarking on an easing cycle in 2019.
During this fragile time, the fund’s capital return has seen a minor loss at an annualized rate of -1.06%2. Much of this was due to a difficult 2018, but the fund’s capital largely recovered over the course of 2019. Over the past three years, our focus was firmly set on our income objective: delivering sustainable income regardless of the market conditions. We are pleased with our progress in this area so far: we have met our income target by generating an annualized income of over 4.22%1. A client who invested £10,000 into our fund at launch would have seen monthly income payments totaling over £1,1203 over the past three years (see Figure 1).
Figure 1: Cumulative income from £10k investment
Past performance is not a guide to future returns. Source: Invesco as at 30 November 2019. The income shown is net of corporate tax.
Meanwhile, fund volatility has remained well below our target. The fund’s realized volatility at the end of the first three-year period (as measured by the standard deviation of its weekly returns since inception) was 2.86%, comfortably less than half the realized volatility of the MSCI World index over the same period, which measured 11.36%. At the same time, the fund’s correlation with other asset classes4 remained low (see Figure 2).
Figure 2: Correlation analysis
Source: Bloomberg. Period covered: inception of the Invesco Global Targeted Income Fund (UK) (30 November 2015) through 31 December 2019. Weekly data used.
We achieved this by constructing a truly diversified portfolio, in which no asset type or idea is allowed to dominate. This is what sets the fund apart from single asset funds that may well offer the same income, but do not offer the same diversification characteristics.
Over the years, the fund had exposure to up to seven different asset types – four of which have generated income for our portfolio (see Figure 3). We believe that being able to find alternative sources of income is important – particularly in today’s world, where ‘lower for longer’ has become accepted reality.
Figure 3: Income contribution pie chart since inception
Source: Invesco as at 30 November 2019.
A complementary diversifier to a wider portfolio
Some may wonder what the fund’s place and function would be within a portfolio. The fund has been designed to help meet investors’ increasing demand for investment opportunities that can provide them with stable income at a time when traditional income-generating assets such as government and corporate bonds, are trapped at historically low yield levels.
The fund offers the following characteristics:
- Regular monthly income: Access to flexible sources of income with the aim of generating stable monthly income, without the need to take excessive risk
- Capital preservation: Aiming to mitigate losses, so that capital can be preserved
- Non-traditional diversification: Emphasising risk management by breaking away from traditional asset allocation and being unconstrained by asset type and geography
Given the above, we believe there are a wide range of options for using the fund within a portfolio. In our view, it can be used to either complement fixed income assets within a diversified portfolio or as a core part of an income-focused portfolio.
1 Before the deduction of corporation tax.
2 Source: Invesco. As at 30 November 2019.
3 Source: Invesco. As at 30 November 2019. The cumulative monthly income is calculated using the net distribution rate for the Z acc share class of the Invesco Global Targeted Income Fund.
4 Global stocks are represented by the MSCI MSCI World 100% Hdg GBP index. US stocks are represented by the S&P 500 Hdg GBP index. European stocks are represented by the Eurostoxx® 50 GBP Hdg index. Emerging Market stocks are represented by the MSCI Emerging Market Net Total Return Local Currency index. Global government bonds are represented by the Citi World Government Bond index – Developed Markets (currency-hedged in GBP terms). Global corporate bonds are represented by the Barclays Global Aggregate Corporate Hdg GBP index. Commodities are represented by the Bloomberg Commodity index. Currency is represented by the US Dollar index. An investment cannot be made directly into an index.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
The fund makes significant use of financial derivatives (complex instruments) which will result in the fund being leveraged and may result in large fluctuations in the value of the fund. Leverage on certain types of transactions including derivatives may impair the fund’s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the fund being exposed to a greater loss than the initial investment.
The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. This counterparty risk is reduced by the Manager, through the use of collateral management.
The securities that the fund invests in may not always make interest and other payments nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity for the securities in which the Fund invests, may mean that the Fund may not be able to sell those securities at their true value. These risks increase where the Fund invests in high yield or lower credit quality bonds. As one of the key objectives of the fund is to provide income, the ongoing charge is taken from capital rather than income. This can erode capital and reduce the potential for capital growth. Although the Fund invests mainly in established markets, it can invest in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise.
Important information
This article is for Professional Clients only and is not for consumer use.
All data is as at 30/11/2019 and sourced from Invesco unless otherwise stated.
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 article 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 the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown.
Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
