Citywire + rated Paul Read has said Invesco Perpetual is running around 17% liquidity across the £23.5 billion it runs in fixed income portfolios, warning it is a necessary buffer against potential runs on the asset classes.
‘Part of the reason is that, in the market, when it is needed, liquidity is rubbish,’ said Read. ‘Investment banks are under pressure, and there is not much desire to hold inventory.'
Data issued by the Federal Reserve Bank of New York shows that dealer corporate bond inventory has declined from a peak of above $250 billion pre-crash to a recent figure closer to $20 billion.
‘We saw this in last year’s “taper tantrum” in May/June – a lot of liquidity tried to get through a small door. We run fairly sticky money however, and are seen as someone you come to when you need a bid, so my hope would be that we would be able to pick something up if it came to it.’
While he said that on balance he remained ‘sanguine’ over the course of the remainder of the year, he added that the reach for yield at least partially reminded him of the pre-crash complacency.
‘My worry is that we are facing something like a 2006/07 period where the market continues to grind forward and it is just very difficult to make money for people,' he said.
‘Being defensive can be painful and is a difficult process over the medium term but we are just going to have to live with that – we have made a lot of excess returns in recent years and we may now have to sit it out a bit.
‘We are not out here to beat a drum and say that this is a market that you have to be buying.’
He reiterated hisview first offered last year that over the medium term blue chip equity returns yielding over the equivalent corporate debt with the strong potential to increase dividends made fixed income a second-tier asset class.
While the fund has done very well out of the recovery in the European banking system, he added that remained much more sceptical about the current craze for contingent convertible (Coco) issuance.
‘You have to remember that these are deeply subordinated and in the event of any difficulty, they will be absorbing capital losses. It’s not like old-style subordinated debt there’s no pussyfooting around.’
Over the last three years the Invesco Perpetual Corporate Bond fund has returned 24.9% versus a peer group average of 21.29% while the Invesco Perpetual High Yield fund has returned 42.28% versus an average of 26.99%.