A guide to the Invesco Bond Income Plus Trust

With capital growth and income returns both in high single digits, global high yield bonds produced excellent returns for investors in 2024*. This year also has the potential to be another positive one for the asset class. The big question is whether the income element will have to shoulder the burden – as concerns remain prominent about spreads widening and hitting capital returns hard.

Credit spreads are currently towards the lower (tight) end of their range. Figures from Morgan Stanley show that at the end of 2024, the spread on US and European high yield stood at 310bps and 340bps respectively**. It is a trend that’s consistent across credit, including investment grade bonds. Figures from the ICE BofA Global High Yield Index typically place spreads for high yield at around 550bps**, although these are elevated due to periods of stark volatility – such as the Global Financial Crisis when spreads hit 2000bps. The reality is that spreads can stay at these tight levels for prolonged periods, particularly if there is economic stability.

But there will still be selective opportunities for those willing to take advantage of volatility and those with the scope to invest globally across the high yield spectrum.

“We are slightly more cautious, but still optimistic. Valuations and yields are lower than they were at the start of last year – so there are less rewards on offer. 2023 and 2024 really were a case of finding absolute value in the market; 2025 is going to be about finding that relative value. What is more attractive relative to something else.”

That’s the view of Rhys Davies, manager of the Invesco Bond Income Plus (BIPS) investment trust. BIPS aims to provide capital growth and a high income by investing predominantly in high-yielding fixed income securities. The portfolio is well diversified across countries and industries and has maintained a consistently high level of dividends for many years. The final portfolio typically holds between 210-260 positions. Rhys has managed the portfolio since 2014 (with co-manager Ed Craven joining in 2020). Over the past five years the trust has returned 40.8% to investors***, in addition to a very attractive dividend yield (currently 7.08%)***. BIPS has maintained a consistent high level of dividend for several years.

BIPS is the result of the May 2021 merger between two investment trusts (City Merchants High Yield and Invesco Enhanced Income), with BIPS being a continuation of the former. Following the merger, the quarterly dividend was increased from 2.5p to 2.75p (11.0p per annum) per share; this has continued to rise and now stands at 12.25p.

Investment process

Targeting three broad areas of high yield

The portfolio invests across three broad areas of the market. Income generators (bonds issued by non-financial companies that pay a high level of income) form the core of the fund. Alongside this segment are banks and subordinated financials – bonds in this area of the market continue to pay a premium over other areas of the market. The final area is credit-intensive bonds – these are bonds the team feel can turn around performance having come under significant price pressure.

The team’s investment universe has around 780 names; although this does not include several subordinated financial instruments, which can take this to over 1,000. The process starts with Rhys building a macroeconomic overlay for the trust. This allows him to look at the broad areas of the market in which he sees potential opportunities.

The main research is around credit analysis, where the 19-strong research team look for credits that have visible cashflows and good fundamentals. The aim is to maximise returns from acceptable and understood credit risk exposure.

The next element is a valuation assessment. This looks at the risk/return profile of any bond in relation to cash, core government bonds and the rest of the fixed interest universe. The team also look at risk considerations, analysing all holdings in order to understand the risk involved to ensure diversification in the portfolio.

The portfolio managers enter the majority of positions with a view to holding them until their call or maturity date, with the investment process based on making investments where the yield to maturity or call appears to them to be at least an adequate reward for the risk. Portfolio turnover is expected to be very low as a result.

The team look across the entire market for value, which can include CCC-rated bonds and occasionally a distressed name if they believe there is value in the opportunity, for example a route out, such as new management or a restructure.

Why now for this portfolio

• Strong long-term performance, highlighting the manager’s ability to be flexible across markets
• Move to higher-quality assets (while maintaining an attractive income) offers investors greater security
• Has grown its dividend consistently in recent years (targeting 12.25p per share in 2025)
• Huge resources behind the team helps them find opportunities across the globe
• With an AUM of £390m, BIPS has an increasing scale to take advantage of opportunities
• Gearing of 13% gives the manager the opportunity to take advantage of any weakness/volatility in markets in 2025

Manager’s View

“There are still attractive opportunities out there, but we have to be pickier, particularly when it comes to new issuance”

2024 was another good year for risk assets – with equities and high yield continuing to perform. Rhys had positioned the portfolio more cautiously going into the year – because he felt the fundamental picture was not particularly strong, with valuations fairly stretched and spreads looking tight (and continuing to get tighter throughout the year). However, the all-in yield compensation received from the markets means it did (and still does to a fair degree) remain relatively attractive. However, yields and spreads have compressed, meaning he is slightly more cautious on the outlook for 2025.

Rhys points to Trump 2.0 clearly being a major force in the market over the short term and he and the team are prepared for a lot of rapid policy activity. He believes economic data is going to be important this year – particularly how central banks respond to Trump. 

“When it comes to Trump we are going to have to think about the impact tariffs have on the picture for fundamentals. Central banks are telling us the uncertainty that currently exists means that they can’t really think too far ahead in terms of their policy and the impact it has on the bond market.”

Rhys does believe the domestically-focused nature of the US high yield market will be shielded from global trade uncertainty, meaning there will be some interesting opportunities in the market despite prices rallying markedly since 2022.

Inflation is just about behaving, in Rhys’s view – adding that we can feel fairly confident that we’ve put some distance between the current rates and what we saw in 2022 and 2023.

He says: “Tariff impacts would be inflationary – but it would be temporary. The greater focus for us on a tariff/trade war would be the impact on economies. I think we are heading in the right direction.”

Rhys believes default rates are likely to remain benign. He says we did see activity last year in terms of distressed exchanges on bonds (companies looking to amend the terms on bonds to avert a bigger restructuring of their balance sheet). He says this move has provided breathing space for companies in 2025.

He says: “There are still some companies out there with higher borrowing costs than they can afford. Borrowing costs have fallen but not enough for those companies. These are the companies doing those distressed exchanges or perhaps they are working out a path to a re-financing and accepting a higher interest rate (effectively kicking the can further down the road). We were surprised at the markets’ willingness to lend to some of these companies.”

He believes spreads can get slightly tighter from here, adding that although we have seen a lot of enthusiasm in markets for Trump at the back end of 2024, we have seen some nervousness in recent weeks, adding that credit spreads have actually held up well despite the volatility in equity markets.

Portfolio activity

Five ways the portfolio is prepared for a more cautious and selective market

Rhys has highlighted five themes within the portfolio which have prepared it for the current environment. Some are long-standing, while others have been introduced in the past 12-18 months. 

Theme 1 – Upping the credit quality

The biggest trend is the ongoing move of upping the credit quality with BIPS. Exposure in B-rated bonds has gone from 27.6% to 20% throughout 2024. The trend has been going since the market started selling off in 2022 (B-rated high yield bonds accounted for 37.8% of the portfolio in March 2022). The theme has started to slow down to a degree, but investment grade exposure has almost doubled in that period (15.2% in March 2022 to 29.6% in December 2024)^.

Rhys has been selling some of the weaker credits which have risen in price (while the yield has fallen), making the risk-reward profile less appealing. Effectively using the strength in markets to increase the quality of holdings.

Examples include attractively-priced Tier 1 bonds (Bank CoCos). These include Barclays, which issued an 8.5% CoCo in May 2024, and Nationwide, which launched their own CoCo in September 2024 at 7.5%.

The team also added to their holding in short-dated Ford bonds. It is a 6.8% coupon due in June 2026. Rhys says: “It was just part of the portfolio that we are comfortable will make that coupon and allows us to look elsewhere for more credit risk.

Theme 2 – Adding to floating rate notes

Rhys and the team have seen more floating rate issuance in the past couple of years as companies bet on rates going down. He says additional starting coupons on floating rates typically offer 100bps more, so there is sufficient compensation on rates declining over the next 12 months or so. He says buying those bonds now is a hedge if the rate-cutting path does not materialise. Examples include popular French frozen dinner business Picard, which has a 6.3% coupon (Euros).

Theme 3 – Adding CDS index positions

The team have also added some Credit Default Swaps (CDS) – which are around 5% of the value of the portfolio. These are effectively an insurance policy against spreads widening. Rhys says at around 3% per annum they are reasonably cheap given how tight spreads are. He says: “It is not a long-term holding, but we thought it was prudent to add to the portfolio given the strength of markets.”

Theme 4 – Adding to long-term, less liquid holdings

The team have also been adding to long-term and more illiquid positions, something which is clearly harder to repeat in the open-ended space. These smaller positions pay a premium on their coupon due to their illiquidity. Many of these positions are in the banking space, such as UK Digital Bank Atom, which has an 11% coupon in Sterling. Rhys says this is more of a FinTech business, backed by a strong owner.

They also have Newcastle Building Society (Lower Tier 2 – Sterling 12.25%). This is a small issue of circa £20m. Rhys says this is much lower than a typical high yield bond – but is almost the perfect vehicle for a low liquidity investment – adding that he has met the management team and is confident in them. They also have a 12.5% coupon with Saffron Building Society (also Tier 2).

Theme 5 – Being more selective

Rhys believes 2025 will be a continuation of what was seen through 2024 – an increase in less attractive coupons. This doesn’t mean they won’t find more deals on both the primary and secondary market – it just means they will have to be pickier.

He says: “We are slightly more cautious, but still optimistic. Valuations and yields are lower than they were at the start of last year – so there are less rewards on offer. 2023 and 2024 really were a case of finding absolute value in the market; 2025 is going to be about finding that relative value. What is more attractive relative to something else.”

Recent activity

During the weakness in gilts early in 2025, the team added UK landlord Hammerson (£ 5.875% ’36), once their bonds had passed a yield of 6.5%. Rhys says they felt this was an attractive entry point for an investment grade-rated bond with almost twelve years to maturity^^. 

Another addition was French fashion label Isabel Marant (Euros 8%, 2028) at a stressed price of 55. The team believe the company’s brand remains strong, and recent earnings disappointment is due to a wider slowdown in the luxury clothes segment. The team also added to German auto parts supplier ZFF ($ 7.125% ’30). New issues from electricity generator ContourGlobal ($ 6.75% ’30) and Italian technology firm Engineering (€ 8.625% ’30) were also added^^.

Sales included exiting a position in UK supermarket, Asda, which was acquired during the market sell-off in 2022, as well as reducing the trust’s exposure to UK theme park operator, Merlin Entertainments. Rhys says both companies are struggling to generate free cash flow. Investment grade rated bonds from Hewlett Packard and Rolls Royce were sold to make way for higher yielding purchases^^. 

Rhys says the team will buy bonds if they have a lower yield but have great potential for capital upside. He says: “We will do that, but the opportunity faded last year as yields continued to fall. The focus is currently on finding bonds where more of the yield is coming through the income.”

Rhys says there are fewer opportunities within capital-intensive bonds, with many of them coming from the CCC/weakest part of the market. Examples of these bonds with a restructuring story include Thames Water, where the BIPS team are part of the restructuring committee (this is an example of where the team benefit from being part of the larger Invesco business).

Rhys says the US has more of those types of capital-intensive businesses. However, not only have they been strong performers in 2023-2024, there are also issues from a location perspective. He says: “You don’t want to be involved in a restructuring when you are one European account and everyone else is based in the US.”

Performance

The trust has returned 63.8% (share price) and 66.7% (net asset value) over the past 10 years, compared with a 60% return for the ICE BofA European Currency High Yield Index (GBP Hedged)^.

Over three years (since BIPS has started to increase its credit quality), it has returned 14% (share price) vs. 12.3% for the benchmark^.

What else do investors need to know?

The portfolio has an official gearing limit of 30% of net asset value, although this currently stands at 12%. Rhys says BIPS may need this gearing for periods of weakness this year due to the likes of further volatility and valuations resetting. BIPS is one of the few trusts that has managed to consistently operate on a premium (currently 1.57%) in recent years****.

Rhys says the increased availability of income in recent years has helped cushion the impact of volatility in the market.

He says: “Our job as managers is to think about credit risks and rate sensitivity and manage that in the portfolio. We do that with an overlay of achieving the dividend target – which was increased at the end of 2024 to 12.25p.”

“We like saying if you buy £1,000 on shares, you know you can get £125 income over the next couple of years. Then leave us to manage the credit risk in the portfolio. We do that through credit analysis and diversification.”

Ongoing charges stand at 0.91%

Outlook

Backed by the huge fixed income resource at Invesco, this closed-ended vehicle is a strong consideration for investors wanting access to the high yield market. Rhys and his team can invest across the fixed income spectrum, but tend to focus specifically on the high yield market in Europe and the UK. The team have demonstrated their ability to manage risk through diversification, while also paying a consistent level of dividend for a number of years.

We like the macroeconomic overlay Rhys puts on the trust and the ability to deploy assets to react to changing events. We feel that in a tighter environment for high yield, BIPS is well positioned to adapt and take advantage of opportunities to find additional capital on top of an attractive all-in yield.

*Source: FE Analytics, discrete calendar performance, 2024

**Source: Morgan Stanley

***Source: Janus Henderson, 4 December 2024

****Source: AIC, 13 March 2025

^Source: trust presentation, 2025

^^Source: quarterly update