This month, Bond Fund Intelligence interviews Tony Wong, Invesco's Head of Global Credit Research & Liquidity. Invesco manages over $201.7 billion in bond fund assets and another $78.3 billion in money markets. We ask Wong about the manager's latest challenges and strategies, and he explains why recent concerns over the bond market are overstated. Our Q&A follows. (Note: This "profile" is reprinted from the January issue of BFI. Contact us if you'd like to see the full issue. Also, note that Wong will be a featured speaker at our upcoming Bond Fund Symposium, March 23-24, in Boston.)
BFI: Tell us about your history. Wong: We've been in the U.S. bond mutual fund business since the 1970's and liquidity since the 1980's. As a global fixed income house, we have a broad range of asset class solutions and capabilities for both institutional and retail markets.... Personally I've been with the firm for 20 years now. I started as a research analyst ... and eventually moved into my current role of overseeing our global credit research platform. [I also have] business oversight of our global liquidity franchise.
Invesco Fixed Income underwent a transformation in 2011. [We've] added significantly to our talent and capabilities, most notably by strengthening our macro team. As you know, we have a strong legacy in bottom up capabilities and we have continued to strengthen our research platform and investment processes. Additionally, we've taken the effort to drive more collaboration and what I call 'IQ compounding' by co-locating many of our team members in Atlanta. Previously, the liquidity and high yield teams were in Houston, core fixed income -- investment grade and macro teams -- was based in Louisville, and emerging markets was in New York. (Our offshore businesses are still concentrated in London and Hong Kong.)
BFI: Tell us about Conservative Income. Wong: I am very excited about this solution in the post MMF reform world. We're coming up on our 3-year anniversary.... Knowing the landscape and liquidity markets were going to change with money market reform, this fund provides an alternative. It's not a constant NAV product, obviously. We priced the product at $10.00 NAV at inception. I don't like using the term "cash plus" or "enhanced cash," given the stigma that's associated with those terms. But we intentionally designed something that's ultra-conservative, ultra-short duration. It's just a little bit further out the curve than a money market fund but positioned inside of a typical short term bond fund. Our intention with this product is to invest roughly about half of it in typical 2a-7-type securities, and with the remaining half invest it in very high quality short duration corporates and ABS securities, as well as plain vanilla student loans, credit cards and auto loans.
BFI: What's your biggest challenge? Wong: A big challenge for products like Invesco Conservative Income Fund is market and client education. Most of the products in that space are still relatively new.... It takes folks some time to learn about ... the value attributes, as well as the risks. Institutional investors, especially, need to get comfortable with [these characteristics] if they are to be used as surrogates for cash. It has to make its way through investment policy committees, etc., before those strategies can ramp up to a meaningful degree. I think the retail market for these products may be very interesting. If you have a rising rate environment, based on our views of the marketplace right now, shorter duration products may make a whole lot of sense to investors. So we feel very optimistic about that particular solution. You get a little more yield and current income than money funds but without taking as much of the attendant risk [as] longer duration products.
BFI: What is driving bond fund flows? Wong: There are major drivers of flows in the fixed income market, post-crisis. You have had a low, zero-rate interest rate policy environment, in some cases a negative rate environment (like in Europe and Japan).... You also have a demographic issue in terms of the aging of society, [and] as people age, the need for income normally increases. [Given the] experience of some investors during the crisis, many have also looked for the sanctuary of something that has more downside protection [than equities].
In this current environment, what's challenging is [that] politics, starting with Brexit and leading into the U.S. elections in November and upcoming European elections, is likely going to matter a lot in 2017. When I say politics, I'm talking about the implications of policies, whether it's trade, taxes, economic formation; all those things will have implications on growth and inflation outlook. [This] is a very major contrast to the markets that we saw post financial crisis, which [were] driven by expectations on central bank policies. There's a lot of uncertainty around the timing, around the size, around the composition of what these future policies may look like.... What will winners and losers look like, especially when I think about the credit space? Some of the things that are being talked about have material implications for industries and companies. Those are some of the challenges any bond manager faces right now: to understand the policies and the implications they will have on monetary and fiscal policy more broadly ... and then to specific industries and individual credits.
BFI: What kinds of investment strategies can and can't you use? Wong: Our funds, in terms of what they can buy and what they can't invest in ... are dictated by the prospectuses and the investment objectives for the funds.... We have a process and a platform that incorporates both our top-down and bottom-up capabilities.... On our public sector credit research team, we're following more than 3,500 issuers globally on a real time basis around the world, across different industries and geographies.
On the macro, the top-down side, [we have] similar breadth in terms of our ability to cover countries and form views on both growth and inflation, on currency, on rates across your major G-20 countries [and] extending more broadly across the emerging markets landscape. So combined, we bring a powerful [package] of resources applied to deliver ideas from our global platform to our clients. In the bond space, investors are looking at the depth and scale of your offerings. A lot of our distribution partners are looking to [align] more closely with a smaller set of providers, not a larger set. For Invesco and our competitors, [the question is] are we able to deliver full scale solutions across the range of strategies and do it in a very competitive manner? That's one of the challenges I think for the marketplace as a whole. We feel we're very well positioned given some of those attributes I talked about.
BFI: Do you run SMAs and/or ETFs? Wong: We run the full gamut in the fixed income space, everything from closed end bond funds to unit investment trusts, ETFs and separately managed accounts. We are really [agnostic] about the product wrapper -- we believe in delivering world class institutional quality active management. Certain investors want certain things and we have the infrastructure and the platform to provide that.... In terms of our ETF strategy, while we certainly have our share of passive strategies, our focus has been more in the "smart beta" space, where we can leverage our unique expertise ... to provide more value-added solutions, but through the ETF wrapper.
BFI: What are fee pressures like? Wong: I think investors everywhere are assessing, and rightfully so, the value they’re getting from their various investment choices.... I think the general trend, in terms of fees, is down, and I would expect that to persist. Some people attribute this to the growth of passive [strategies]. So active managers, ourselves included, are going to have to prove our value, prove our worth.... I would highlight our High Income Muni Fund or our Core Plus Fund, as examples where -- if you can consistently generate performance, whether during both up-markets and down-markets, manage your volatility, and have that performance be sustainable ... you're going to be a winner.
BFI: What about your outlook for 2017? Wong: As a large institutional manager, we’re always mindful of the attendant risk in the marketplace. With the policy and political uncertainly going into this early part of 2017, the playbook has changed.... But we feel like we're very well positioned as a firm to localize, understand, and manage those risks, [in order to] best position our portfolios to capture opportunities in this environment. This should be a bond picker's market, and well-resourced, active managers like Invesco should be well positioned to generate alpha.
Second, this narrative in pockets of the market about the demise of bond funds and a structural reallocation away from fixed income investments ... my feeling is that it's widely overstated. If you look at the world today in terms of demographics, motivations of institutional investors [and the] needs of retail investors for income and capital preservation ... the data I see does not suggest an imminent and structural re-risking towards equities. [T]hose are all very supportive factors for fixed income solutions."
