This article was taken from the March 2025 edition of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications
High-yield is an area of the bond market involving investment in debt securities issued by companies which are generally considered riskier than those issued by higher-quality, investment-grade corporations. To compensate investors for the higher level of risk they typically pay a higher return, or yield, on the debt. This higher level of yield is called the spread and can be measured relative to investment grade corporate bonds or government bonds, which are generally considered credit-risk free. Rating agencies such as Standard & Poor, Fitch, and Moody’s will categorise bonds according to the level of default risk, with BB+ from Standard & Poor and Fitch, or Ba1 or below from Moody’s indicating a high-yield bond.
Invesco Bond Income Plus (BIPS) is a UK-listed fixed income investment trust allocating primarily to UK and European high-yield markets to generate a high level of income for shareholders. It is run by the Invesco Fixed Income team, which is well resourced by 250 investment professionals. Rhys Davies is lead manager on the fund, with 21 years of experience, including a decade in high-yield.
Within the high yield market, BIPS offers diversified exposure across geographies and industries through three broad areas. The primary objective of the trust is providing investors an income and, consequently, most of the investment is in bonds issued by non-financial companies offering a high income to compensate for greater leverage on their balance sheets. The fund also has exposure to banks and subordinated debt issued by financial companies which is paid back last in case of a default, generally offering a higher yield than broader market. Much of the remaining exposure is distressed debt which is considered to have a high chance of default issued by companies which the fund managers of BIPS believe have credible plans in place for recovery.
While high-yield carries more credit risk than investment-grade, the Invesco team analyses both the company and debt issues to look for an attractive balance of risk and reward. Corporate hybrids, for example, are a type of junior bond that are considered riskier than the standard debt issue of a company. However, BIPS typically invests in corporate hybrids issued by large, investment-grade companies. While the bond is considered high-yield due to it being ranked lower for claims on assets in case of a default, the underlying issuer is investment-grade. This means the fund receives a higher yield but with exposure to a high-quality corporation.
Though BIPS typically focuses on high-yield issues, in recent years the fund managers have gradually increased exposure to lower-risk investment-grade bonds. By the end of 2024, 29% of the portfolio was invested in investment-grade bonds. This was partly driven by a higher interest rate environment offering better yields in higher-quality bonds, without taking additional credit risk. However, the fund has also reduced overall high-yield exposure due to increased refinancing risk in the area, as well as increasing the tilt to better-quality high yield issues. For many years, companies operated in an ultra-low interest rate environment. This shifted in 2022 due to the lingering impact of the pandemic, the invasion of Ukraine and the subsequent energy crisis. Market participants have since shifted expectations to a ‘higher for longer’ interest rate environment. Many high-yield issuers, which are typically companies with a more uncertain outlook and lower-quality balance sheets, are having to refinance debt with higher coupon payments to attract investors. Many of these companies are expected to struggle with the subsequent higher interest payments. With spreads tight, the managers of BIPS are more selective about high-yield bonds investment, looking to ensure that the pickup in yield relative to an investment-grade bond adequately compensates for the increased credit risk. In such environments, BIPS benefits from the analyst team’s credit analysis and deep understanding of the issuing companies.
As mentioned, the primary goal of BIPS is to provide a high level of dividend income for investors, with the investment trust structure allowing for the smoothing of distributions. It successfully achieved its target 11.5p dividend per share for the 2024 financial year and currently offers a 7.0% yield at a 170.4p share price. Given that the return is driven by a high level of income, investors looking for capital growth will likely find the trust less attractive. Dividends are paid quarterly in February, May, August, and November.
Discounts are a much-debated feature of the investment trust sector at present, with many trusts’ share prices trading well below net asset value (NAV). While this can be an attractive entry point for investment, there is no guarantee that discounts will close, and a widening discount can heavily drag on returns. BIPS is one trust trading at a tight premium, with the share price trading at, or slightly above, NAV. This is due to the board’s strict discount management, with an annual continuation vote ensuring a cash exit for investors preventing a large divergence of share price from NAV. Trading at a premium allows the trust to scale up through new share issuance, providing additional liquidity to shareholders. As of January 2025, total assets were £385.3m.
Market participants are facing a highly uncertain global macroeconomic environment, with potential implications for every asset class. For a high-yield focussed strategy, tight spreads prove challenging as any widening could result in a fall in capital values, as yields are inversely related to prices. This is also a risk if persistent inflation pushes interest rates up. Despite a challenging environment, BIPS benefits from the flexibility of the strategy allowing the fund managers to tilt away from the core high-yield exposure and into more attractive investment-grade issuers. With an experienced team, prudent board oversight and attractive yield, BIPS may continue to interest income-seeking investors looking for diversified high-yield exposure.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of writing but may have changed at point of reading.