‘Virgin Media is the best high-yield investment’

But Rhys Davies of Invesco also owns many bonds issued by banks such as Lloyds and Barclays. He tells Jessica Beard why

Reliable income is at the top of many investors’ wish list but is in short supply at present. Dividends from British companies fell by 27pc in the first three months of 2021, according to the Link Dividend Monitor, and have fallen by 42pc since the pandemic began.

Bonds tend to be more secure but yields are low, the bonds expensive, and potential returns unappealing. However, some fund managers have ventured into higher-yielding, riskier names and been rewarded.

The Invesco Monthly Income Plus fund beat its rivals last year, generating 6.7pc in 2020. Rhys Davies, who co-manages the bond portion of the £2.3bn stocks-and-bonds fund, tells Telegraph Money why he snapped up cheap bank bonds last year and why those opportunities have since dried up. He also explains why he thinks Virgin Media is the best high-yield investment in Britain.

WHO IS THE FUND FOR? It does what it says on the tin, so is ideal for anyone who wants regular income.

HOW DO YOU PICK BOND ISSUERS? Credit analysis is at the core of what we do. Before we buy a bond – which is effectively lending to a company – we want to make sure the issuer can pay the interest.

WERE YOU WORRIED FIRMS WOULD DEFAULT DURING THE PANDEMIC? At its height there was a lot of concern about “high-yield” markets, the riskiest businesses, and their ability to pay the interest. The response from the authorities changed everything. Many high-yield companies benefited from government schemes such as furlough or tax breaks. My concern is that now a lot are left with more debt than before the pandemic.

Overall, the market crash in March 2020 created some good opportunities for us to buy bonds more cheaply.

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WHY HAVE YOU BOUGHT SO MANY BANK BONDS? A lot of bank bonds fell in price significantly last year. We were able to pick up Lloyds and Barclays bonds, for example, a lot more cheaply than previously.

“Subordinated” bonds from banks – which are riskier as they offer less security but pay higher yields – have been a core investment since the financial crisis in 2008. Back then it was about buying bonds at distressed prices on the basis that the banking system would recover. Roll forward 10 years and it is a different investment. They are in a much better place than they were.

ARE THERE STILL GOOD DEALS OUT THERE NOW? The best opportunities were last year. Over the course of 2021 we have seen yields fall and prices rise. We are always willing to take a chance when a bond is at a fair price, but I have to be careful buying risky bonds just for the sake of yield. We are treading carefully at the moment. All the money from central banks will keep yields low.

WHICH COMPANIES ARE THE RISKIEST? There are obvious casualties affected by social restrictions, such as airlines, travel and leisure firms, restaurants and cinemas. We have to be very careful about investing there. We did have some bonds from companies that couldn’t pay and a handful had to go through some kind of restructuring. We owned very small amounts of Hertz, which in the end is well placed to recover.

WHAT HAS BEEN YOUR BEST INVESTMENT? One of the most satisfying was backing Ford’s jumbo $8bn (£5.7bn) bond deal in April last year.

The company had been downgraded to high yield and was burning around $800m of cash a week at the peak of its troubles, so it was in a tough position. It was a great example of the market naming its price. After a strong rally we sold those bonds for a 28pc profit just two months later.

AND YOUR WORST? Abengoa bonds. This was a Spanish engineering firm that we bought in 2010 and still owned in 2016 when it had to restructure. It was not the company investors had thought and a large debt write- down was needed. We sold in 2018 at a loss of nearly 90pc, a very large loss for a high-yield bond.

HOW ARE YOU PAID AND DO YOU INVEST YOUR OWN MONEY IN THE FUND? I get a salary and a bonus linked to the performance of the funds.

I don’t need income from the fund now but I invest my pension as the fund has a good record.

WHAT WOULD YOU BE IF NOT A FUND MANAGER? I love fish and diving, so I would have been a marine biologist.