Mark Paris, head of portfolio management and trading for the municipal bond team at Invesco Ltd., faces an especially daunting task as he guides the firm's flagship high yield muni fund through its 30th year.
With headlines on credit risk in Puerto Rico and Illinois spooking some investors, Paris is sticking with his strategy of maintaining diversity, liquidity, and credit selectivity in the essential service revenue, lower investment-grade, and nonrated sectors to provide the extra income his retail and institutional clients crave at a time of low absolute yields in the generic market.
Since its inception on Jan. 1, 1986, the Invesco High Yield Municipal Fund has increased to $7.8 billion and is still growing, Paris said, thanks to heavy credit research that has unearthed value in the housing, prepaid gas bond, and continuing care retirement community sectors, to name a few sectors.
"We look for anomalies where yields exist in the marketplace," Paris told The Bond Buyer.
The fund has maintained an average annualized total return year to date of 2.03%; one-year, 6.03%; three-year 5.62%; five-years, 8.81%, and 10-year, 5.08%, according to the firm's website.
It has posted a 6.20% average annual total return since inception.
The S&P Muni Bond High Yield Index returned 2.76% year to date, 4.01% for one-year; 4.17% for three-year, 8.55% for five-year; and 5.13% for 10-year.
Paris said the portfolio managers rely on fundamental credit research provided by the 15 credit analysts who are part of a 26-member municipal bond team he oversees from his New York headquarters.
"If an analyst thinks it's a triple-B equivalent bond, but its trading like a single B we get a much higher yield," Paris said.
Paris assumed leadership of the municipal bond team in June 2015 when the firm decided to streamline and consolidate its 18 open-ended high-yield and high-grade municipal mutual funds into one group with one overall management strategy.
Later in the year, Robert Wimmel, Tom Byron, and Brian Sipich left positions in portfolio and asset management at Invesco to join BMO Global Asset Management. In March another former Invesco team – William D. Black, Brian Winters, and Doug Gibbs – took posts at City National Rochdale. An Invesco spokesperson said it was against company policy to comment on personnel matters.
The firm offers a full suite of municipal products, including 10 closed-end and eight open-ended municipal mutual funds with combined assets under management of $24 billion. It also oversees separately-managed accounts.
The open-ended mutual funds include the Invesco California Tax-Free Income Fund, the Invesco High Yield Municipal Fund, Invesco Intermediate Term Municipal Income Fund, Invesco Limited Term Municipal Income Fund, Invesco Municipal Income Fund, Invesco New York Tax-Free Income Fund, Invesco Pennsylvania Tax-Free Income Fund, and the Invesco Short Duration High-Yield Municipal Fund, which was launched in September 2015 to expand its high-yield offerings, according to Paris.
Its flagship Invesco High Yield Municipal Fund is the largest of its fleet, with 1,200 positions in total – 40% of which is nonrated paper. However, the fund does not own more than 1% in any one name, which is part of a diversification and bottoms up research strategy to which Paris attributes its successful performance.
That combination provides the opportunity to earn yields in excess of 300 basis points versus the generic, triple-A general obligation benchmark, Paris said.
Site visits by the credit analysts are the key to investing in the nonrated and below investment-grade sectors, according to Paris.
The underlying security in the essential service project revenue bond sector is what piques his interest over GOs, he said. The fund currently owns hospital bonds, toll roads, water and sewer bonds, and others that are backed by a solid revenue stream.
"A lot of managers have been moving into the revenue space, but we always liked the essential service project revenue bonds more than GOs," he said. "When you buy a project revenue bond, you're basically buying a user fee dedicated to pay the bond," he said.
CCRCs, which make up 17% of the high yield fund, perform well in an improving housing market, and if they are located in strong demographic and geographic areas, like Naples, Fla., where retirement and the 65-and-older population is growing consistently year over year, according to Paris.
"Now that the housing market has settled in, we have been able to negotiate strong positions when we buy a new deal," he said, noting that they typically buy the CCRC bonds when the facilities are in the start-up stage.
By contrast, the fund owns less than 0.5% in Puerto Rico paper and avoids other speculative bonds that have made headlines in the last two years.
"We like to stick to our knitting," Paris said. "We don't pile into one sector just because it's hot. Diversity is the key to what we do, and we still have long-term performance numbers."
While the high-yield fund is open-ended, Paris said it has been closed to new investors for the last 18 months under a "managed growth philosophy" to protect shareholders by keeping a steady distribution yield at a time when there is a lack of new issuance in the high yield space.
As a result, the fund has maintained its dividends since September 2014 while funds in the peer group have been a lot more fluid in their dividend policies.
Overall, Paris said the high yield fund and the other Invesco municipal funds should continue to performance well as long as the fundamentals remain steady in the municipal market as a whole.
"The tax code changed the demand aspects of the municipal market, so demand for municipals has been really steady," he said. The negative supply that has persisted since 2010 is balanced by positive flows, and municipals' low correlation to stocks has kept demand "pretty strong" in spite of the scarcity, he said.
"Municipals don't have that energy story that corporate bonds have and the lower oil prices have not shaken up the municipal market," Paris said. "With the fundamentals of municipals, as long as the economy is growing, municipals should be in good shape."
