This month, BFI speaks with Matt Brill, Head of US Investment Grade Credit at Invesco and a Portfolio Manager on Invesco's Core Plus Bond Fund and Invesco Corporate Bond Fund. Invesco has been expanding its fixed income presence through acquisitions, most recently taking over Guggenheim's ETFs and the Oppenheimer Funds. Brill tells us about Invesco's history and lineup in the bond fund space, strategies for 2020 and a number of other major issues confronting bond fund managers. Our Q&A follows. (Note: The following is reprinted from the December issue of Bond Fund Intelligence, which was published on Dec. 13. Contact us at info@cranedata.com to request the full issue or to subscribe. Note too that we published our latest Bond Fund Portfolio Holdings on Friday; let us know if you'd like to see our latest "cut".)
BFI: Give us some history. Brill: Invesco Fixed Income (IFI) manages about $370 billion across multiple asset classes. We are headquartered in Atlanta, and [our group] has offices in Atlanta, London and Hong Kong. The Global Investment Grade Group manages about $50 billion across retail and institutional strategies. I started in the industry in 2002 doing commercial mortgage backed securities then eventually investment grade corporates [at ING]. In 2013, Michael Hyman and I were both brought over by Greg McGreevy, [who was] looking to build out the investment grade debt and the overall [core] fixed income platform at Invesco.... Since then, our team has raised roughly $30 billion dollars of investment grade assets, and our track record is very strong.
BFI: Tell us about the bond fund lineup. Brill: My group manages four main mutual funds in the U.S., including Invesco Core Plus, which is really our flagship product. This is the large space, the intermediate 'Agg' space, and is the largest fixed income subclass, if you will, or asset class.... We view this [fund] as your one-stop shop, if you want to take one bond fund that's going to be able to get you the expertise of multiple different asset classes and [reduce] risk. It has the stability of having Treasuries and U.S. agencies, but also has the flexibility and the risk-taking ability to add some EM [emerging market] and high yields. It's about a $4.5 billion fund, give or take ... and the track record is very strong.
The other three [funds] would be GTO, which is an ETF of Core Plus.... It's basically a mirror-like product. Nothing is exact in the fixed income world, but it's intended to be very similar to the retail fund, and GTO has been growing like crazy. It's about tripled in the last year to about $200 million.
Then Invesco Corporate Bond Fund is about $2 billion.... [As of today], it is the number one performing corporate bond fund of 2019. It is investment grade with some high yield and some emerging markets, versus Core Plus, which is going to have structured securities in it, including U.S. asset backed securities [and] mortgages.... You might even have some collateralized loan obligations. Core Plus is a lot more diversified and has more asset classes at its disposal, that’s why we kind of view it as the flagship product. The Corporate Fund is more concentrated in that it is all corporate.
Last would be our Short-Term Bond Fund, which is very similar to Core Plus [but] shorter in duration.... We view it as more of a 'cash plus'.... You're outside the realm of a Conservative Income fund but you’re still intended to be low volatility, with a very minimally changing NAV.
BFI: What are you buying? Brill: Right now, we've been overweight in high yield.... We have about 10% exposure to high yield in Core Plus, most of that is double-B rated high yield. For 2019, double-B's have been the best performer out of high yield. Triple-C's have really been the worst performer, and we essentially have no triple-C's.... Our view has been that the search for yield globally, with ... anywhere between $12 to $17 trillion dollars in negative-yielding securities, is forcing global investors into the U.S. to buy yield.
The other key trade [for 2019 and] going into 2020 is to overweight the triple-B's. Triple-B's are a sensitive subject within the investment grade world. You go back a year ago, a lot of investors were screaming that the sky was falling in the triple-B space, and they thought that this was a canary in the coal mine.... But we took the opposite approach.
Our view was that these corporations had identified that they had a problem, that they were over-levered.... While the economy was still in good shape, they could de-lever their balance sheet. So our view is that triple-B's were attractive from a valuation standpoint and from a fundamental standpoint.... Triple-B has been the best performer ... of 2019, of any part of the ratings spectrum, and we feel like there is still more room to run.
BFI: What's your biggest challenge? Brill: The way that I describe fixed income in general to people is that the risks are asymmetric. You don't get the upside that you get in the equity world.... We don't have the ability to hit that homerun.... What we're trying to do all year long is hit singles and doubles.... We can't have those large credit losses or downgrades that you get owning something that goes to high yield or has a perceived risk of default (or does default).... That's the number one task is to avoid these large losers, because it's a lot more difficult to make it up.
Getting it right from a macro standpoint is [also] important.... But the time that's going to matter is when the next recession happens. Predicting the next recession and being out in front of it is going to be the most important call for any manager to make from a macro standpoint ... in the next two to four years. But the question is, when is it going to happen? Our view is that 2020 is not a recession, it's not a pivot year. So we don't think you need to start de-risking your portfolio yet.
But ... that's the trillion-dollar question. When is the longest expansion in U.S. economic history going to stop? When it does, owning double-B's and triple-B's, there are certain select names that are going to be fine. But you want to own less of them. You're going to want to own materially less corporate credit [and] want to be more in Treasuries and more in agency mortgages, which will fare much better.... That's the balance we, as risk managers, have to take.... But our view is that we do have at least another 12 months of runway before we have to start being overly concerned.
BFI: Talk about fund flows. Brill: In general, it's easier to manage inflows than outflows and we've been fortunate enough to not have any material outflows over the last six years.... Core Plus, when I started in 2013 was about $600 million. So it's up from about $600 million to $4.5 billion.... Keeping enough risk in the portfolio can be challenging if you get too many inflows at any given time. The new issue market and the new issue calendar has been very robust for the last several years in both investment grade, high yield and EM, [and] our fund is a flexible, manageable size. [So this] gives us the opportunity to take advantage of the new issue concessions.... We're actually able to buy cheaper than the secondary market.
BFI: Who are the big buyers of the fund? Brill: Core Plus, specifically, is primarily purchased by individual retail investors.... [But] about two thirds of the assets we manage as a group are institutional.... High yield is the more retail-oriented product line, but IG is more driven by large institutional pension plans, insurance companies, etc.
BFI: How do you feel about the future? Brill: All year long, you've seen outflows from the equity market and you've seen large inflows into the fixed income market. We think this is a secular trend; we think this is here to stay. The reasons why are, that you have aging demographics that require fixed income. Whether it's a retail fund of a retiree or it's embedded in an insurance product or a pension plan, all roads lead back to fixed income. Our view is that this insatiable demand for fixed income is here to stay.
The nuances that will occur are that, the ETF space is going to continue to get more and more competitive and more built out.... We think fees are going to continue to go lower as the product becomes easier and easier to trade.... As technology improves in terms of trading, this is enabling investment managers, like ourselves, to do things for cheaper. With that, it is able to make active managers more competitive with passive.
The data shows that active management within fixed income does still work.... Our fund has done very well versus the index -- you can look at some other of our competitors as well. I think that the key here is active will win out.... The index is made up of companies or countries that have the most debt. Do you want to give more of your money to somebody that has more debt? That's how the index is structured, and we don't think that that leads to the best credit picks. That's why, again, we think the future is still active management, more ETFs, and we also believe that the retail fund and the retail flows should remain strong, because the aging demographics aren't going away anytime soon.
