Comment: Invesco fine | Bond funds

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford
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Last week brought news that Invesco Perpetual, the UK’s 
largest retail fund group, has been fined £18.6 million by the Financial Conduct Authority (FCA) for risk control failings. Both the news, and the complacent reaction to it, have surprised and disappointed in equal measure. Financial advisers have tended to downplay its importance, shrugging it off as of little concern to investors, small potatoes in the run of things and a one-off incident. None of these is true.

The FCA imposed the fine because Invesco exposed its investors “to greater levels of risk than they had been led to believe”. Specifically, it failed to disclose the use of, and risks associated with, derivatives in a number of its funds’ prospectuses. Given all that we have been through with the ability of derivatives to blow up in recent years, this is no small matter.

Nor is it exactly “small potatoes”. This is the largest fine that the FCA has placed on a UK fund manager. In fact, the fine would have been more than £25m – an eye-watering sum even for a company of Invesco’s size – had it not agreed to settle with the FCA at an early stage. This secured a 30 per cent cut in the penalty that Invesco was otherwise facing.

And nor was it a one-off. The offences were not a singular incident but took place across a lengthy period – May 2008 to November 2012 – and the “issues” took place across 15 of its funds, including the high-profile High Income and Income funds, which used to be managed by Neil Woodford, the group’s star fund manager for years. It surely merits more than this summation from one fund manager: “Obviously, it is a little bit concerning… this will create some headlines. But does anyone really care?”

Charles Younes, analyst at FE Research, was more on the ball. “It is a real concern that use of derivatives wasn’t explained to investors, because clearly, they do carry a certain degree of risk that should have been properly described to clients.”

Quite. Now we have assurances that Invesco Perpetual have fixed the issue and improved their risk management process. Let’s hope so, and that new manager Mark Barnett is not so cavalier with risk controls.

Cashing in on bonds

Toppy equity markets, rising geopolitical risk, and growing political uncertainties at home: investors can be excused for thinking that bond funds offer a safe haven for savings.

I’m not convinced, even though I’m increasingly cautious about the high level of equity markets and am looking for assets and markets that could provide shelter over the next year.

However, I do confess to a bias. For the past three years I have not been particularly enamoured of bond funds. Try as I might to overcome this aversion now, I’m finding it a struggle.

As investor confidence has rallied with the marked improvement in the economic outlook here and across the developed world, it’s been difficult to argue against equities as the superior asset class.

Bond funds have tended to be the default investment of choice for cautious investors. But for those who have been riding the equity tiger since 2011, it is tempting to consider some re-balancing and a switch from equities to bonds now that the initial stage of recovery has run its course and the pace looks likely to slow. So I read with 
interest a warning on bond funds from William Eigen, JP Morgan’s chief investment officer for absolute return and fixed income.

Eigen, who manages the $10.2 billion (£6bn) Opportunity fund, has been selling bonds and building up almost 60 per cent of his fund in cash. Speaking to FE TrustNet last week, he pointed to the warning cones now raised for bond fund investors.

“Nearly every part of the global credit markets looks pricey,” he said. “This includes US and European high- yield debt, investment grade credit, agency mortgage-backed securities, emerging market debt and convertible bonds amongst others.” 

Bond markets are pricing in near- perfect fundamentals and the continuation of an unprecedented set of circumstances. But these are now set to unwind as economies return to pre-crisis levels and rates of growth.

The US Federal Reserve announced last week it is further scaling back its programme of quantitative easing and the next step is likely to be a rise in interest rates over the next 12 months. Higher rates are also likely here over this period. Other factors suggest the market is looking vulnerable to a correction. For those in a cautious frame of mind, best to build up cash for now.