How does Invesco make money

How you can still make money with bonds

In the last 15 years it has been easy to make money with bonds: since 1991 alone, the yields of German government bonds have fallen from almost nine percent to currently just over four percent due to falling inflation rates. But the environment was also almost ideal for corporate bonds, because together with the lower default rate, which fell from four to around 0.5 percent since 2001, the spreads (risk premiums, i.e. the difference in interest rates between government and corporate bonds) decreased from 1 .2 to 0.5 percent. "Anyone who would have gone on vacation five years ago as a corporate bond fund manager would still have earned good money," says Adam Cordery, fund manager of Schroder Euro Corporate Bond, in a nutshell.

"Fund managers have to remember old virtues"

“The environment has changed dramatically in the last two years, and it has now become much more difficult to achieve performance with bonds,” reports Cordery. What matters now is the individual selection of the individual bonds. “Just as generations of bond fund managers have done before us,” says the expert, who switched from INVESCO to Schroders in June 2004 (see also “Manager death at INVESCO” from February 15, 2004).

Fewer titles, more tracking errors

Adam Cordery, who started his career as an economist at the Civil Aviation Authority in 1989, is therefore opportunistically relying on a wide variety of investments in his Schroder ISF Euro Corporate Bond: "Government bonds, emerging markets, high-yield corporates and derivatives". Since Cordery took over the fund on July 10, 2006, some things have changed: "During the 3-month conversion phase, I have streamlined the fund's portfolio from over 150 bonds to 60". In addition, he has swapped a large part of the bonds with long maturities and without additional contractual restrictions for short-term bonds with restrictions for the issuer or added high-yield corporates and increased the portfolio turnover: “The average holding period of my bonds is 6-12 months, previously this at 1-2 years ". With the tracking error now also higher, Cordery wants to beat its benchmark, the Merrill Lynch EMU Corporate Bond, over every market cycle and be in the first or high second quartile of my S&P peer group.

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The first successes are already emerging ...

In any case, since the end of the restructuring in early September 2006, it has been well in the running: While the Schroder ISF Euro Corporate Bond rose by 1.05 percent, the index only came in at 0.8 percent. In the previous five years, however, the fund missed the Merrill Lynch EMU Corporate Bond Index by an average of 110 basis points per year.

Where is the recession supposed to come from?

Cordery is positive for the coming months: “The market is afraid of a recession. But where is it supposed to come from? ”He asks. Because after a small dip in growth in the current year, economic growth should pick up again in 2008 in all major regions of the world. Even the failure rate of global companies, which is currently at a historic low of 0.5 percent, is not a bad harbinger: “OK, it is unlikely that this will decline any further. But even in the worst of times, around the beginning of the 1990s, it was only four percent. This means that 96 percent of all companies have continued to pay their coupons ”. In addition, he sees only a maximum of two interest rate hikes in the euro: “The market has already priced in an increase to 4.1 percent by September”.

Private Equity: Boom or Bubble?

The only point that Cordery is currently worried about is the sharp rise in leverage in leveraged buyouts (LBOs): “Since 2003, the leveraging of LBOs has increased from six to nine times profits. We last reached these levels in the late 1980s under Mike Milken, ”he warns. As a consequence of the glut of liquidity, many private equity investors are currently paying too much for their assets, which also means that many bad companies are financed.

Quality of new bonds is falling ...

The quality of new bond issues is also tending to decline dramatically: “Hybrid structures for investment grade bonds or so-called pay-in-child structures, in which more bonds are simply issued instead of coupons, are not healthy. This will go wrong in two or three years, ”he predicts (more on this topic:“ Targeted bonds: chocolate instead of interest ”from October 24, 2006)

... and how to protect yourself against it

As a consequence, Cordery invests in bonds from banks ("these are heavily regulated"), asset-backed securities, bonds from British utilities ("these cannot fall below investment grade"), bonds with specific restrictions on the issuer (" about not taking on new debt ”) or short-term bonds (“ here the risk of LBOs is almost excluded ”).

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