Selected Issue 6 - Summer 2019


Bank exposure

Financials have been an important part of our portfolios for a long time. In particular, we saw subordinated bank capital as an opportunity in the post-crisis period, as the capital and regulatory structures of banks have been reformed and strengthened. As of the end of February, the Invesco Corporate Bond Fund (UK) had a weighting of 25% in banks. However, we are not taking as much risk in this area, either in terms of subordination or maturity (or the creditworthiness of the issuers), as we have in the past. As you can see from the following table, most of the exposure is in senior paper and legacy tier one and tier two. Only a small portion is in the most subordinate, contingent capital.

While we have less exposure to bank capital now than for much of the last decade, we still see an opportunity in the bank sector. This is based on valuations and the resilience we see at the sector and issuer level. We look at the sector from the bottom up and there is a clear bias in our portfolios towards stronger, ‘national champion’ names, but we can say that in general capital and leverage levels are strong and problems with non-performing assets are being addressed. Many of the banks we hold exceed the new regulatory targets by a considerable margin. The sector has been stress tested, in the UK and the eurozone, numerous times now, with all but some very weak entities passing. In some cases, even those weak banks have been able to raise capital to address their problems. There is no doubt that the interest rate environment is a challenge to the sector’s profitability but we think that valuations reflect this. At the end of 2018, the CoCo index offered more spread than at almost any point in the history of the index (see below).


% of Fund

Bank Senior


Bank Covered


Bank Capital - Lower Tier 2


Bank Capital - Upper Tier 2


Bank Capital - Tier 1


Bank Capital - Tier 2 Cocos


Bank Capital - Additional Tier 1




The time to maturity / call of the securities we hold is getting lower. The table below shows the schedule of maturity / call dates for the fund’s holdings. As these securities move towards maturity, the market will tend to price them closer and closer to par and price volatility declines.


% of Fund



Source: Macrobond as at 14 March 2019





Cathal Dowling Fixed Interest Product Director

















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 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 and where we use derivatives. The fund has the ability to make use of financial derivatives (complex instruments) which may result in the fund being leveraged and can 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. The Fund may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events. Changes in interest rates will result in fluctuations in the value of the fund. Important Information This document is for Professional Clients only and is not for consumer use. All data is as at 28/02/2019 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 document 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.

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