This article was first published yesterday in the Telegraph’s Questor column.

Investment trusts gave up selling new shares to investors last year during the stock market funk over rising interest rates and inflation, so the launch last week of £15m of new shares by Invesco Bond Income Plus (BIPS ) has drawn attention to the listed bond fund.

Created by the merger in 2021 of two other bond funds run by Invesco, BIPS’ name is a play on ‘bp’, which means ‘basis point’. Pronounced ‘bip’, bp is used in the City to mean a hundredth of a percentage point, a useful measure for the small but significant movements in interest rates and bond yields.

With the aim of generating a high dividend yield, currently 6.8%, and capital growth, BIPS holds nearly three-quarters of its assets in high-yield bonds issued by companies with chequered credit histories, or from banks that shore up reserves of capital to use in a crisis. 

The remaining 28% of the fund’s money goes into lower-yielding, but safer, ‘investment grade’ bonds, mostly rated ‘BBB’. These rank below the top credit ratings of A and AA but are still considered good.

After rapid rises in the past two years, the Bank of England base rate stands at 5.25%. That means the fund’s lead manager Rhys Davies doesn’t have to take too much risk to generate the income for BIPS’ 11.5p per share dividend target this year.

Davies, who worked on both of BIPS’ predecessors – City Merchants High Yield and Invesco Enhanced Income – concentrates on higher quality BB-rated bonds within the high yield segment. Only 3% goes in the riskiest and lowest CCC-rated bonds.

Cautious about the possibility of a recession and the strains on company finances from higher interest rates, Davies and his co-manager Edward Craven have spread BIPS’ assets widely. 

They hold 237 bonds from 160 issuers, which reduces the impact of individual companies defaulting on loans. Its largest corporate exposure is 3.4% of the fund to Lloyds Banking Group (LLOY).

Outside bank bonds, which account for more than a quarter of the portfolio, BIPS allocates 8% to insurers, 7% to car manufacturers, and 5% apiece to gaming and telecoms companies.

BIPS’ share issue, the first by an investment trust this year, is timed to attract former Henderson Diversified Income shareholders who are receiving £54m from its merger with Henderson High Income. 

Other investors can also apply for the shares, which can be bought free of the usual 0.5% stamp duty through a stockbroker. The offer closes next Wednesday at midday.

The new shares will be priced at 0.75% above their net asset value (NAV) on 5 February. This makes them slightly cheaper than BIPS existing shares which stood at a 2% premium to NAV when the issue was announced, and whose purchase would incur stamp duty.

Unlike many of the trusts tipped by Questor, BIPS shares don’t trade at a discount. However, Davies says there is an investment opportunity because the prices of BIPS’ high-yield bonds have been depressed by interest rate rises.  

Many bonds issued at £100 trade today at about £90-£92 because high interest rates made their fixed levels of income unattractive. Their price had to fall to raise their yield above government bonds. With interest rates thought to have peaked, that pressure should reverse. 

Meanwhile, the bonds will benefit from a ‘pull to par’ effect that will see their price gradually revert to £100 as the loans mature and are repaid over the next five years or so.

Together with the interest paid on the bonds, that should generate a total annual return of about 8%, which the managers can lift to about 9% by increasing their market exposure through gearing, or borrowing. This share offer is worth taking up.

Questor says buy, take up share offer.

BIPS facts

Market value: £308m
Year of listing: 2014
Share price: 171p
Premium: 2.1%
Average premium over past year: 1.6%
Yield: 6.7%
Most recent year’s dividend: 11.25p (December 2022)
Gearing: 11%
Annual charge: 0.9%