Invesco Enhanced Income expects strong gains environment to moderate over the rest of 2019 – Invesco Enhanced Income (formerly Invesco Perpetual Enhanced Income) (IPE) had a solid first half period to 31 March 2019, delivering a NAV total return of +1.9%. This compares to total returns of -2.3% for the shares and +0.8% for 3-month LIBOR. The shares currently yield about 6.75%.
Overseas bond interest the biggest income move year-on-year
| wdt_ID | Asset class | Six months to 31 Mar 2019, £’000 | Six months to 31 Mar 2018, £’000 |
|---|---|---|---|
| 1 | UK bond interest | 1,712 | 1,710 |
| 2 | UK dividends | 85 | 85 |
| 3 | Overseas bond interest | 2,426 | 2,620 |
| 4 | Overseas dividends | 5 | 5 |
| 5 | Deposit interest | 8 | 1 |
| 6 | Total | 4,236 | 4,421 |
A breakdown of IPE’s income generation is shown in the table above. The company’s holdings can be split into three broad categories: income generators, subordinated financials and more speculative, credit intensive positions. The first two categories account for around 85% of the portfolio with the credit intensive allocation making up the remainder. At a sector level this means that subordinated financials remain the portfolio’s largest allocation. Banks have significantly rebuilt their balance sheets since the global financial crisis and the sector offers an attractive level of income in IPE’s view.
Managers Outlook
IPE’s managers, Paul Read, Paul Causer and Rhys Davies had this to say on the fund’s outlook: “Despite the rally year-to-date, the premium over government bonds that high yield companies need to pay to borrow remains higher than it was a year ago. Moreover, the more dovish backdrop has re-ignited the search for yield and investor demand for new issues is very strong. That said, the overall level of yield has fallen back towards recent averages and so we must expect the strong gains we enjoyed in the first quarter of 2019 to moderate from this point.
Since the end of the review period, high yield markets initially continued to rally, with European currency high yield spreads touching a low of 366bps. A number of factors helped drive this: improving relations between the US and China; stronger economic data; record highs for the US stock market and a continued dovish sentiment from central banks. However, sentiment reversed in May following a re-emergence and escalation of trade tensions between the US and China; additional tariffs aimed at Mexico; souring Italy – EU relations and weaker economic data. Risk assets, including high yield suffered and spreads widened back out to 446bps. Government bond yields fell sharply as markets started to price in the chance of US interest rate cuts, a far cry from market expectation of just six months ago. Companies that reported weaker than anticipated results saw quite significant repricing. With yields and volatility increasing in recent weeks we have found a number of opportunities to add some bonds to the portfolio at more attractive levels. The portfolio maintains a good level of liquidity to take advantage of any further repricing.”
IPE: Invesco Enhanced Income expects strong gains environment to moderate over the rest of 2019