Invesco Bond Income Plus delieved an NAV return of 11.7% over 2023 and a 10.5% return to shareholders. The 11.7% NAV return was slightly below the 13.8% achieved by the ICE Bank of America Merrill Lynch European High Yield Index.
Dividends totalled 11.5p (up marginally from 2022’s 11.25p) and these were covered by earnings of 12.23p (marginally down on 2022’s 12.47p).
During 2023 7.4m shares were issued and subsequent to the year end a further 10.1m shares have been issued.
Extracts from the Q&A with managers
Q: What factors contributed and detracted from these returns?
A: This year we started with a higher level of income which provided a firm base for returns. This was contrary to 2022 when returns were dominated by the impact of interest rates. Rate hikes pushed down prices across the bond market and the lower levels of income then prevailing offered little protection, resulting in losses.
Both interest rate exposure and credit risk were positive factors. As would be expected from a portfolio focussed on higher-yielding bonds, credit risk was a large contributor, with returns from exposure to investment grade corporates and hybrid capital as well as corporate high yield. Notwithstanding the weakness in March, subordinated financial capital instruments were also a positive factor for the full year.
A number of banks were among the top 10 returning holdings, including subordinated bank capital instruments issued by Lloyds Banking Group, Barclays and Deutsche Bank. Corporate bonds from Aggreko (equipment rentals shown as Albion Finance in the Investments in Order of Valuation on page 26), Vodafone Group and Stonegate Pub Company also made the list.
Our portfolio had exposure to Credit Suisse AT1 bonds when they were written down, which detracted from returns. This was partially offset by gains from our holdings in Credit Suisse senior bonds, which rallied strongly after the write down.
The biggest detractors from returns also included Codere New Topco and Thames Water Finance. Codere New Topco is a multinational gaming company. While we have confidence in the underlying business, the company has been struggling to stabilize its balance sheet since the disruptions of the pandemic. We will continue to watch this process closely to assess the longer-term outlook. Thames Water Finance is relatively highly indebted for a UK utility and also suffers from the negative newsflow surrounding the water sector. However, it is a regulated company with stable revenue. Negotiations between the company and its major shareholders continue and our expectation is that fresh equity will be raised, relieving some pressure on the company’s bonds.
Q: How has the portfolio changed?
A: We continue to feel that this is a positive environment for bond investment. Yields are higher, providing a good entry level and a valuable income cushion. Interest rates are relatively high and it looks likely that they have peaked and will fall over time. This provides a supportive backdrop.
We have added bonds with what we see as attractive levels of coupon or yield, which will help us to provide income for the trust in the years to come. In many cases we have done this through investment in relatively high quality bonds and companies. We are pleased that we can do this as we are wary of the risks that exist in the lower quality parts of our universe.
Over the year, the credit quality profile of the portfolio has been improved. More than a quarter is now allocated to investment grade-rated bonds, a relatively high level in the history of this portfolio. Exposure to high yield-rated bonds has fallen overall. Within this, the BB rating has been increased while B and CCC have been reduced.
While we have reduced exposure to high yield companies, we have been happy to take some more exposure to subordinate debt in stronger companies, through corporate hybrid bonds. These are junior bonds, but the issuing companies are typically large, investment grade-rated names. We have also added to subordinated financials, including banks. Following the sell-off in March, both banks and regulators have taken steps to ensure the continuing health of the AT1 market and it has performed well. AT1 bonds continue to form a reasonably significant part of the overall portfolio.
We have been able to add bonds throughout the year that we are very comfortable holding and which echo the much more creditor-friendly market in which we are now operating. BT issued a GBP BB+ 8.375% hybrid bond (2028 call). Allwyn Entertainment, Europe’s largest lottery operator, issued a EUR BB 7.25% 2030 bond. Dana Financing Luxembourg, one of the world’s largest auto parts suppliers, with a strong position in both legacy and electric vehicle markets, issued a EUR BB- 2031 bond in May with a coupon of 8.5%. In 2021 they issued a similar bond with a coupon of 3.0%.
Net gearing on the portfolio was reduced slightly over the course of the year, from 15.7% to 12.4%. This reflects both a more cautious outlook and the greater availability of income in the market as yields remain relatively high and more high-coupon bonds are issued. While the cost of borrowing through the use of repo financing has risen significantly during the year, there remains a net benefit to shareholders in terms of yield in utilising this form of financing.
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