There’s income to be found these days in corporate bonds, and the Invesco Corporate Bond fund is one place to look. The actively managed fund invests mostly in U.S. corporate bonds, a majority of which are investment grade. Its A-shares offering, ACCBX, has a 30-day SEC yield of 5.12%. While it has had a rocky year and a half, volatility is to be expected, said Matt Brill, head of North America investment grade credit for Invesco Fixed Income. That’s because the fund also has a small portion of high-yield corporate debt holdings. “Having more credit risk does introduce a little bit of volatility, but if we are getting these calls right over the longer term and getting more right then wrong, it does add up,” said Brill, who is also the senior portfolio manager of the fund. ACCBX has a total return of 1.5% for the year, and lost 16.73% in 2022, according to Morningstar. However, its performance over the past 10 years puts it near the top of its category. That’s about the time that Brill came aboard, after a stint as a portfolio manager at ING Investment Management. He’s been in the industry since 2002. The fund, rated four stars by Morningstar , has a month-end trailing 10-year return of 2.96%, putting it in the top 6% of its category. It has $2.7 billion in assets under management and an expense ratio of 0.77%. “The team employs a structured investment approach that delivers a competitive edge over their peers,” Morningstar analyst Thomas Murphy wrote in June. Here are its top holdings The fund’s managers typically invest 80% to 90% in developed-markets corporate credit and 5% to 10% in dollar-denominated emerging market debt. Some 74% of the holdings are in U.S. corporate bonds, as of June 30. While they can invest up to 30% in non-investment-grade bonds, they typically don’t go that high, Brill said. Instead they stay between 7% and 15%, he said. The hunt for the next investment-grade bond The team is very specific when it looks for high-yield plays, Brill said. “We are usually buying the higher quality, BB-rated high-yield names that we think give us some diversification away from just investment grade names, but also give us stability and security of income as well,” he said. The bonds Invesco likes are also ones that a lot of high-yield managers view as too high quality for their funds and therefore stay away from, he said. Brill looks to get in early in what he calls “rising stars” that will at some point move into investment grade. For example, Netflix and Occidental Petroleum had high-yield bonds that were upgraded this year, he said. “We’ll add a little bit more risk and with risk comes a little bit more volatility, but if done with proper risk management as well as really good security selection, we can limit that downside from those and add to the overall yield and total return to the portfolio,” Brill said. The team’s approach When deciding on the fund’s allocations, the management team wants to make sure it has the right macro view of what’s going to happen in the economy in order to determine how much risk the portfolio should have. They then focus on sector calls, and populate it with the right security selection, Brill explained. For instance, in addition to “rising stars,” the team also looks for things happening in the market that will be a catalyst for the companies paying down debt or retaining their investment-grade rating. For instance, Brill saw a big opportunity to get into regional banks after the recent banking turmoil. “We’re finding out which sectors we really like and then within it, which credits we think are going to benefit the most from it,” he said. “Then we diversify the portfolio to make sure not all of our eggs are in one basket.”
This story originally appeared on CNBC
