Invesco Perpetual’s co-head of fixed income Paul Read said his portfolios have been hit in the third quarter by his exposure to bank debt and financials, but he believes these positions will pay off in the long term.
The manager of the Citywire Selection Corporate Bond and Monthly High Income Plus funds conceded he had the ‘wrong’ portfolio in the third quarter, although this was not solely due to his positions in bank debt and financials, and was also a cause of not having exposure to more safe-haven assets.
Read said: ‘We’re still very confident in investment case for bank debt and financials, but we’ve had poor performance in Q3 – it’s a Q3 issue though, across our portfolios.
‘We had the wrong portfolios for the third quarter – but this was not just in financials and banks, it’s about having risk in a market that was the worst quarter for risk in a decade.
He said the poor performance 'was also due to not having exposure to risk free assets such as gilts and treasuries that have been rallying in Q3. This made for portfolios that didn’t perform.'
However, he added: ‘From here we are confident about our portfolios – we would not want to de-risk in this market environment. There is tremendous value in high yield and little in government bonds.’
However, the manager conceded there remains considerable uncertainty around banks and financials at the moment.
‘Q3 would’ve been better to have more gilts and less risk, but this is not how we manage money.’
Read also has significant exposure to French and UK banks in some of his portfolios. In September S&P downgraded the Corporate Bond fund's triple A rating down to double A, over concerns surrounding liquidity and because the £5.7 billion fund had around £1 billion of exposure to French and UK banks.
Read said he did not see the S&P downgrade of his Corporate Bond fund as entirely negative, although he found their comments on liquidity surprising.
He said: ‘We’ve run concentrated portfolios for years…but I can’t blame anyone in this market for being a bit prudent and cautious.’
In terms of areas where Read sees value, he said there are opportunities in Italian, Spanish and French government bonds.
‘The Irish government bond market has been rallying strongly in the last couple of months, those spreads have come in a lot – it’s not a big area of exposure for us at the moment but it’s one to watch. So there are a number of areas where we see good value.’
He also sees quality in investment grade corporate bonds that may have been tainted by what the peripheral European sovereign debt crisis.
'We’re finding opportunities in financials. anything that’s tainted by what’s going on in periphery. So big Spanish and Italian corporates have seen spreads widen; in high yield there’s substantial value coming through,' he added. 'In a world running away from risk there’s a tremendous build-up of value.'
Over the last three months, the Corporate Bond fund was down 3.83% compared with the Markit iBoxx Sterling Corporates Total Return index, down 1.32%.
In terms of three year performance, the fund was up 26.21% compared with the Markit index which returned 18.17%.
The Monthly Income Plus fund was down 6.99% over three months compared with the BofA Merrill Lynch Euro Currency HY Constant Hedge index, down 8.49%.
Over three years, the fund was up 30.85% compared with the index’s 45.45% return.