Rhys Davies, manager of the newly Elite Rated Invesco Bond Income Plus Investment Trust (BIPS), discusses the origins, goals, and strategies of BIPS. He also covers the nuances of subordinated bonds and corporate hybrids, the diversification and sectoral spread of the portfolio, and how the trust leverages opportunities in the high-yield bond market, especially during inflationary times.
Why you should listen to the interview
BIPS is the largest trust in the AIC Debt – Loans & Bonds sector at almost £375 million. Manager Rhys Davies gives an excellent look into the trust and the benefits of a closed-end approach when navigating the riskiest areas of fixed income.
This interview was recorded on 5 July 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
What is BIPS?
“Invesco Bond Income Plus (BIPS), is an investment trust focusing on income primarily from the bond market. So having a focus on high income means we’re naturally investing more in the high yield part of the bond market. BIPS was formed in 2021 with the merger of Invesco Enhanced Income and City Merchants High Yield Trust, which were two investment trusts that we managed for many years on the desk here in Henley. So what we now have is the largest in the AIC sector.
“And what we want to offer shareholders is a high and consistent level of dividends, paid quarterly, that are well flagged in terms of what shareholders can expect to receive. So we have a target of 11.5p per annum per share, and shareholders know exactly what to expect in terms of income going forward.”
Benefits of the investment trust structure
“As an investment trust it means that when an investor in the trust wishes to sell their holdings, instead of taking money out of the fund, they’re going to sell those shares on the stock market. So not having to worry ultimately about potential outflows should we be in a weak market is one because it then feeds into other things such as being able to invest in less liquid, perhaps smaller issuers.
“For BIPS being a close ended vehicle, we can think about participating in some of those less liquid names. The majority of what we own is very liquid. But it’s nice to have the option to be able to invest in some of these smaller less liquid issues.
“So recently BIPS was able to purchase bonds rate of a small UK building society called Saffron. It’s a relatively small building society with a very small bond. And actually because of the small size of that bond and the lack of interest from open-ended vehicles, buying that for BIPS meant that we also got a much better coupon because of its small size and its relative illiquidity. So that is paying 12.5% per annum, and that’s very nice to be able to put into an income portfolio like this.
“One of the most most important features of an investment trust that we do make use of is using borrowing (gearing). So we think that some borrowing when it’s used carefully can be a very useful tool.
“The nice thing about borrowing on a bond portfolio is essentially it allows us to buy more of the bonds that we like. So those bonds will not only move around in price, but also there we are buying more of the income that they generate. So for this fund it’s just below 15% at the moment. So that’s 15% of the net asset value is then borrowed again. We can take it higher if we feel that the market is looking particularly exciting in terms of opportunities. Right now we’re not feeling that.
“It kind of does what we need it to do, which is allows us to invest in more of the bonds that we like, without having to take too much credit risk in the portfolio. And to more than cover the dividend target that we have. So the target is currently 11.5p per annum. And that gives a dividend yield today of around 6.7% on today’s share price. That 11.5p is more than covered.
“The yield on the portfolio today is just below 8%. That comprises both the income that the portfolio is making, but also the potential for that capital upside. We put those two elements, the income and the capital upside together into one yield, which we call the gross redemption yield or the yield to maturity. And that’s around 8% portfolio. But then because we have that gearing in place that helps amplify the yield further when we think of it on an NAV basis. So with that gearing in place, you can start to think of it as maybe around a 9% yield on the net asset value.”
The light at the end of the tunnel
“Sometimes things do go wrong for companies that have issued bonds. Their bonds will trade down in price, trade up in yield, to reflect the issues that they’re facing. And that can create opportunities for us as well. So we may look to be buying those in the secondary market.
“I’m thinking of a name like Aston Martin, for example, it’s at the riskier end of the credit spectrum. Not making much free cashflow. You know, they make great cars, but what we care about is their ability to convert that into cashflow. So they’ve got a lot of money to spend on CapEx. They won’t be making much free cashflow for the next couple of years. And as a result, their bonds have to pay a relatively high yield. It’s into the double digits to be able to lure investors in. So it’s a very nice income for us to be able to earn. But we’ve got to be confident that there is an improving story there.”
Pain on one hand and opportunity on the other
“2022 was definitely the year to avoid bonds. But the beauty of a bond is, if a company doesn’t default in its obligation or a government doesn’t default in their obligation, then they will recover back at the maturity date.
“The nice thing last year, the start of 2023, was we were looking ahead and saying, there’s a lot of income out there because yields are a lot higher than they have been for many years. But also there was the potential for capital appreciation as bonds moved back towards that par price. And it meant that we could put together a very well diversified portfolio of bonds that were paying a far more attractive level of income than they had been able to do.
“So it was tough, but then it immediately created an opportunity for us. And a lot of that opportunity is still there. What we really like, or what I really like actually as a high yield investor, is being able to buy bonds that pay much higher levels of coupon, so that’s the interest rate they pay per annum than we were seeing in 2020 and 2021. And in many cases companies that are issuing bonds today are doing so at at least two times the level of coupon that they would’ve been able to issue and pay when they were issuing issuing back pre-2022. And that makes, you know, life a lot more interesting and exciting when you’re looking for income from the bond market.”
Conclusion
Backed by the huge fixed income resource at Invesco, BIPS is a strong consideration for investors wanting access to the high yield market. Rhys and his team can invest across the fixed income spectrum and have demonstrated their ability to manage risk through diversification, while also paying a consistent level of dividend for a number of years.
