The great migration of fund investors: from equities to fixed income

Some fund companies known for their equity expertise have been aggressively expanding into fixed income in recent years, opening up a "second growth curve". Invesco Great Wall is one such company.

Amid the sluggish equity market, fixed income products have undoubtedly become the "hot choice" for investment in the first half of the year.

From the surge in the on-market prices of bond ETFs to the frequent emergence of "blockbuster" new bond funds, fixed income products are taking over the spotlight from equity products. By the end of June, the scale of newly issued bond funds this year exceeded 500 billion yuan, accounting for over 80% of the total fundraising scale of public funds.

As the backbone of public fund business, the importance of fixed income is self-evident. It provides companies with a steady and sustainable cash flow, serving as a crucial foundation for continuous growth, reinvestment in innovative businesses, and even weathering difficult times. Therefore, fund companies that achieve long-term stable development typically have stable and large-scale fixed income operations.

Some fund companies known for their equity expertise have also been aggressively expanding into fixed income in recent years, opening up a "second growth curve". Invesco Great Wall is one such company. The recently disclosed Q2 report shows that the scale of public fixed income assets under Invesco Great Wall has exceeded 360 billion yuan, making it a significant player in the field.

01 Riding the Wave of Expansion

Perhaps because the equity team's "brilliance is too dazzling", many have overlooked the fact that Invesco Great Wall also boasts two formidable investment teams in fixed income: hybrid assets and pure fixed income.

Take the hybrid assets team as an example. Its AUM was only 1 billion yuan in early 2021, but after three years of development, it has now grown to nearly 50 billion yuan. Li Yiwen, the team leader, has played a pivotal role in this growth.

As a veteran in the industry, Li Yiwen has an inseparable bond with hybrid asset investing.

In 2010, when she became a public fund manager, the first product she managed was a secondary bond fund. At that time, the "fixed income+" business in the public fund industry was just starting, with pure bond products dominating the fixed income market, while secondary bond funds were relatively rare. Due to their inherent higher volatility compared to pure bond funds and the greater operational difficulty, these products received little market attention.

With the implementation of new asset management regulations, the breaking of rigid redemption in wealth management products, the shift to net-value-based products, and the increasing demand for wealth management among residents, "fixed income+" funds have gained development opportunities.

In 2020, after Invesco Great Wall recruited Li Yiwen, the company began aggressively developing its "fixed income+" business. In hindsight, this move coincided perfectly with the rising tide of "fixed income+" development.

Li Yiwen has a profound understanding of "fixed income+". She believes it is not simply a combination of stocks and bonds; rather, the two asset classes should form an organically integrated whole. Managing such products requires a holistic mindset, blending the two asset classes and emphasizing their synergy to achieve optimal results.

For example, in several secondary bond and bond-biased products co-managed with her long-time partner Dong Han, Li Yiwen is responsible for pure bond and convertible bond investments, while Dong Han handles equity investments. In terms of asset allocation, Li Yiwen, with her broader macroeconomic perspective, takes the lead, but major position adjustments are discussed with Dong Han, such as the portfolio rebalancing in Q1 2021.

As Li Yiwen recalls, at the end of 2020, she observed that the yield on the U.S. 10-year Treasury note was below 1.5%. Given the state of the U.S. economy at the time, this yield was undoubtedly too low. She predicted significant tightening risks in overseas liquidity and noted that valuations in many domestic sectors were inflated, which could lead to adjustments in overvalued assets amid liquidity tightening. After discussing with Dong Han, the portfolio avoided overvalued growth sectors in Q1 2021, ultimately dodging the subsequent correction and preventing significant drawdowns in fund NAV.

This is just one of the many exemplary cases from Invesco Great Wall's hybrid assets team.

At the end of 2021, Li Yiwen identified opportunities in upstream resource products driven by inflation and capacity cycles. Coincidentally, Zou Lihu, a fund manager skilled in cyclical stock investments, joined the team that year. After extensive tracking and research, they confirmed the major opportunity in upstream resources and overweighted coal, oil, and certain non-ferrous metal resources early in the portfolio.

In 2022, the Russia-Ukraine conflict further intensified the bull market in upstream resource prices. The team's overweight strategy in resources was ultimately reflected in the fund's performance.

Beyond Zou Lihu, Invesco Great Wall's hybrid assets team includes several other fund managers, each with their own expertise, making the team increasingly well-rounded. For instance, Chen Ying excels at capturing credit bond trading opportunities and identifying stock sector rotations; Xu Dong is adept at top-down asset allocation and actively switching between pure bonds and convertibles; Li Zengzhuozhuo has years of experience in convertible bond research and investment; Li Xunlian is well-versed in macroeconomic research and skilled in drawdown management; and Jiang Shan adopts a balanced growth style focused on equity investments.

The performance of funds managed by this team has been outstanding. The Invesco Great Wall Jingyi Zhaoli 6-Month Holding Fund, co-managed by Li Yiwen, Dong Han, and Zou Lihu, delivered a NAV growth of 7.64% over the past year (benchmark: +4.46%), ranking 6th out of 420 peer funds. Over the past two years, its NAV grew by 11.08% (benchmark: +7.34%), ranking 2nd out of 340 peer funds (performance and ranking data: Galaxy Securities; benchmark data: Wind; as of July 19, 2024). The fund's top-tier rankings and absolute returns on an annual basis speak volumes.

Another example is the Invesco Great Wall Huacheng Stable 6-Month Holding Fund managed by Zou Lihu. Over the past year, its NAV grew by 8.45% (benchmark: +3.10%), ranking 6th out of 270 peer funds. Over the past two years, its NAV growth reached 12.35% (benchmark: +4.97%), ranking 3rd out of 256 peer funds (performance and ranking data: Galaxy Securities; benchmark data: Wind; as of July 19, 2024).

Similarly, the Invesco Great Wall Anyi Return 1-Year Holding Fund, managed by Li Yiwen and Deng Jingdong, achieved a NAV growth of 4.72% over the past year (benchmark: +3.10%), ranking 17th out of 344 peer funds. Over the past two years, its NAV grew by 7.58% (benchmark: +4.97%), ranking 8th out of 328 peer funds (performance and ranking data: Galaxy Securities; benchmark data: Wind; as of July 19, 2024).

Under Li Yiwen's leadership, Invesco Great Wall's hybrid assets team has become one of the most prominent in the market, known for its outstanding performance and substantial AUM.

02 The Other Fixed Income Team

In addition to the hybrid assets team, Invesco Great Wall has another dedicated fixed income team.

As of the end of Q1 this year, Invesco Great Wall's total fixed income AUM exceeded 330 billion yuan, a significant portion of which is managed by this team.

While the hybrid assets team focuses on products like secondary bonds and bond-biased mixed funds, the fixed income team offers a more diverse product line, covering strategies such as credit bonds, rate bonds, absolute return, and fixed income enhancement.

Peng Chengjun, head of the fixed income department, is another industry veteran.

Before joining the public fund industry, Peng spent years working in bank proprietary trading. During his first six years in banking, due to job rotations, he gained exposure to a wide range of assets, including forex, derivatives, bonds, and related derivatives. Through comparative analysis and hands-on investing, he developed a deep understanding of these assets.

Later, Peng entered the public fund industry and began managing products, which gave him new insights into products and clients.

These insights, Peng believes, are key to excelling in public fixed income investing.

In Peng's view, understanding assets means grasping their inherent characteristics and risk-return profiles, as well as identifying ways to generate alpha. Understanding products means aligning investment strategies with their objectives and features. Understanding liabilities means knowing the needs of the underlying investors and adopting investment philosophies that satisfy them.

In practice, Peng has developed a unique bond investment framework centered around five dimensions: duration, term structure, relative value, trading, and spreads. The order of these dimensions also reflects his investment priority hierarchy.

Peng approaches fixed income investing from a fresh perspective, emphasizing not only returns but also aligning products' risk-return profiles with client requirements. The key to fixed income investing, he believes, is not chasing returns but delivering steady performance within controlled drawdown constraints.

Take the Invesco Great Wall Jingtai Yingli Pure Bond Fund he manages as an example. Over the past year, the fund returned 5.2% (benchmark: +3.09%), ranking in the top 10% of peers (65/797). Over the past two years, it returned 8.82% (benchmark: +4.59%), also ranking in the top 10% (54/677), demonstrating stable and outstanding performance (performance and ranking data: Galaxy Securities; benchmark data: Wind; as of July 12, 2024).

Additionally, Invesco Great Wall's fixed income product lineup includes several distinctive offerings, such as the Invesco Great Wall Jingtai Huili Regular Open Bond Fund, Invesco Great Wall Short-Term Bond Fund, and Invesco Great Wall 90-Day Holding Short-Term Bond Fund. For instance, the Invesco Great Wall 90-Day Holding Short-Term Bond Fund returned 3.64% over the past year (benchmark: +2.38%), ranking in the top 10% of peers (12/126) (performance and ranking data: Galaxy Securities; benchmark data: Wind; as of July 12, 2024).

Peng believes fixed income investing places greater emphasis on team collaboration. Currently, Invesco Great Wall's fixed income department includes several specialized fund managers alongside Peng.

For example, Chen Weilin has over eight years of experience managing money market funds. His investment style is proactive yet stable, with a keen sensitivity to liquidity conditions and expertise in large-scale liquidity management and risk control. Q2 reports show Chen's AUM exceeds 180 billion yuan.

There are also seven other fund managers, each excelling in their respective niches, covering areas like rate bonds and credit bonds. For instance, Mi Liang specializes in short-term rate investments; He Jiangbo excels in credit bond allocation and individual bond selection; and Wang Ao is a versatile manager with deep insights into fixed income systems and expertise in large-scale portfolio management.

03 Earning Within One's Circle of Competence

These two teams form the backbone of Invesco Great Wall's comprehensive fixed income capabilities. According to Haitong Securities' latest fixed income fund company performance rankings, Invesco Great Wall ranks 1/14, 1/14, 8/14, and 4/10 in the mid-sized company category for one-year, three-year, five-year, and ten-year returns, respectively. Its fixed income investment capabilities have earned a five-star rating from Haitong over the past decade (data: Haitong Securities; as of June 30, 2024).

Behind these top-tier short-, medium-, and long-term rankings lies Invesco Great Wall's unwavering commitment to risk control, which is deeply ingrained in its DNA.

As a joint-venture fund company, Invesco Great Wall's foreign shareholder has weathered multiple financial crises, emerging stronger each time with a heightened awareness of risk control and compliance, as well as mature risk management methodologies. Drawing on this experience, Invesco Great Wall has implemented stringent risk controls since its inception, adopting metrics from mature overseas markets early on.

Within this risk- and compliance-focused culture, Invesco Great Wall's fixed income team has continuously refined its credit analysis processes, establishing a robust internal credit rating system to strictly control credit risks and ensure investment quality.

Additionally, the entire fixed income team follows a regular review mechanism, conducting periodic evaluations of each fund manager's performance attribution and risk analysis. This helps managers refine their strategies and, to some extent, mitigates overall risks.

As Mao Congrong, the company's deputy general manager and head of fixed income, puts it, the investment approach avoids credit downgrades, instead relying on asset class strategies to achieve absolute returns and steady NAV growth. In short, the goal is to earn within one's circle of competence, with returns stemming from investment skill rather than excessive risk-taking.