INVESCO MONTHLY INCOME PLUS: ‘Income engine’ powers £2bn bond fund

Monthly Income Plus is one of Invesco’s premier bond funds. It’s been around for nearly a quarter of a century, amassing assets in excess of £2bn, and has provided investors with a mix of income and capital returns along the way.

In terms of performance, it’s more Steady Eddie than spectacular, but for many investors it adds ballast to their broader investment portfolio.

The fund is managed from Invesco’s offices in picturesque Henley-on-Thames in Oxfordshire, a town known more for its annual Royal Regatta than its investment prowess (although Neil Woodford earned his reputation as something of an investment star at Invesco before losing it when he went solo and made an unholy mess of running Woodford Equity Income).

Monthly Income Plus’ lead manager is Rhys Davies, who oversees the fund’s broad range of bonds – bonds primarily issued by well-known brand names such as Building Society Nationwide and banking group Lloyds. He is backed by Ciaran Mallon, who oversees the fund’s 10 percent exposure to equities.

“There is a revenue engine at the core of this fund,” says Davies. “It’s fueled by income from a diverse portfolio of bonds and equities.” In total, it has more than 470 holdings and bonds issued by 240 institutions (governments and banks).

Over the past ten years – a period until recently dominated by low interest rates and inflation – it has delivered an average annual return of 3 percent. Not as rewarding as an investment in the FTSE All-Share Index (an average annual return of 6.4 percent), but better than its peer group (2.2 percent). In terms of income, which it pays out monthly, it currently provides the equivalent of 6 percent per year.

While rising interest rates are not good news for bond investors as they erode the capital value of their holdings, Davies believes the worst is over for bond markets. With interest rates in the UK likely to peak at 5% later this year, he says bond prices are starting to rise again and will continue to rise as interest rates fall.

This will enhance the overall return of the fund. Davies says some of the bonds the fund bought in the aftermath of the bond market crash late last year – caused by Kwasi Kwarteng’s unfunded tax cut budget – should prove to be smart investments.

This is because they were bought after prices fell sharply, allowing the fund to lock in on attractive future returns – assuming the bonds are then held to maturity and the companies behind them don’t get into financial trouble.

For example, retailer Asda issued bonds at the end of 2021 that pay a coupon (income) of 4.5 percent per year until they mature in 2026. 20 per cent.

Provided Asda – albeit facing some financial challenges – honors the interest payments and repays the bond at par (the same price at which they were issued), the holding company will generate an annual return (profit) for the fund of 12 per cent.

Davies says inflation is the “nemesis” of bond markets. He is confident that it will come down, but he is not sure to what level.

The fund’s equity holdings are described by Mallon as the “icing on the cake,” offering a “mix of capital returns, income in the form of dividends and, in some cases, income growth.”

Major holdings include retailers Tesco and Next and utility giant National Grid.

The annual costs total 0.72 percent. Other funds that generate monthly income include Artemis Monthly Distribution, Man GLG Income, and Schroder High Yield Opportunities.