IPE.L Regulatory News (IPE)

Invesco Enhanced Income Ltd - Half-year Report

PR Newswire

London, June 7

Invesco Enhanced Income Limited (formerly Invesco Perpetual Enhanced Income Limited)

Half-Yearly Financial Report for the Six Months to 31 March 2019

Key Facts

Invesco Enhanced Income Limited is a closed-end investment company with limited liability incorporated in Jersey. The Company’s ordinary shares are listed on the London Stock Exchange.

Investment Objective of the Company

The Company’s principal objective is to provide shareholders with a high level of income whilst seeking to maximise total return through investing in a diversified portfolio of high yielding corporate and Government bonds. The Company may also invest in equities and other instruments that the Manager considers appropriate. The Company seeks to balance the attraction of high yield securities with the need for protection of capital and to manage volatility. The Company generally employs gearing in its Investment Policy.

Full details of the Company’s Investment Policy (incorporating the Company’s investment objective, investment policy and risk and investment limits) can be found on pages 10 and 11 of the Company’s 2018 annual financial report.

Performance Statistics

(1) Source: Refinitiv.

Interim management report incorporating the chairman’s statement

Chairman’s statement

Results for the six months to 31 March 2019

This is my first reporting period since I was appointed Chairman earlier this year. For the six months under review, the Company has delivered a total net asset value return of +1.9%. This compares to 3 month LIBOR of +0.8%. The share price premium decreased from 3.1% to a discount of 1.0%. Since the end of the reporting period, the Company has returned to a premium and has recommenced issuance of shares. This reflects not only the improving market environment but also the Company’s strong performance relative to both its peers and 3 month LIBOR. On behalf of the Board, I would like to thank the portfolio managers for their continued hard work on behalf of shareholders.

The Portfolio Managers’ Report which follows continues the cautionary tone of much of their recent reporting. Borrowing at the period end was 21% Gross and 18% Net of cash balances.

Outlook

There has been no material change in portfolio strategy. Your portfolio managers continue to seek to add exposure where good opportunities are identified in the areas of the market which they believe can offer relatively high sustainable yields whilst prudently balancing risk and reward with due regard to preservation of capital. Your Board fully endorses this approach.

Kate Bolsover

Chairman

7 June 2019

Portfolio Managers’ report

Market background

The six months to the 31 March 2019 can be split into two distinct periods. During the last three months of 2018, financial markets came under pressure before then rallying in the first three months of 2019. The key catalyst for the change in sentiment was a shift in central bank policy.

Between October and December rising tensions over trade between the US and China, disagreement between the European Union and Italy over the Italian budget deficit, Brexit, some deterioration in economic data and the prospect of higher US interest rates all weighed on sentiment. The high yield sector came under particular pressure at this time with the market punishing companies that were showing signs of weakness. Adding to concerns for the BB part of the high yield market was the end of the European Central Bank’s (ECB) Corporate Sector Purchase Programme.

Sentiment turned following the US Federal Reserve’s (Fed) decision to pivot away from hiking interest rates. The Fed announced that it recognised that economic and financial conditions had changed. Therefore, it was prepared to alter the composition of its balance sheet if economic conditions warranted. This was a significant move by the Fed that saw expectations about the timing of future interest rate hikes pushed out. The Fed re-affirmed this policy shift in subsequent meetings. At its March meeting, the median forecast of members of the Federal Open Market Committee (the body responsible for setting US interest rates), known as the dot-plot, had been revised lower. Having expected three hikes this year as recently as November 2018, the dot-plot now suggested that the Fed would not hike interest rates at all during 2019.

In March, the European Central Bank joined the Fed in pivoting toward more accommodative policy. The ECB announced plans for new Targeted Long-Term Refinancing Operations (TLTRO). The programme is designed to help stimulate the eurozone economy by offering low cost loans to banks over a two-year period. The ECB also updated its forward guidance to state that it did not intend to hike interest rates this year.

Against this backdrop, issuance levels have fallen with Barclays reporting European high yield issuance 39% lower compared to the same period in 2018. While supply has fallen, demand for high yield has been strong providing a supportive technical backdrop for the market. European currency high yield credit spreads (the premium over government bonds that companies need to pay to borrow) began the period at 361bps. They then widened to a peak of 538bps in November 2018 before narrowing to end the period at 416bps.

Areas of the high yield market that experienced significant re-pricing in the latter half of 2018 included the retail, energy and auto sectors. Subordinated financials also came under pressure.

A high-profile example of the re-pricing was Debenhams, which reported significant losses. The company’s 2021 bond fell from a price of £78 in November to £42 in late March 2019. Although not held in the portfolio, the price move is illustrative of the volatility within the sector and serves as a reminder of the potential for material losses in the high yield market.

Year-to-date, the trend reversed with many parts of the market rallying strongly. Indeed, the European currency high yield bond market has had its strongest start to the year since 2012. However, this recovery has not been universal with the dispersion in returns creating some investment opportunities.

Portfolio strategy

The overall shape of our portfolio has not changed greatly over the period. In broad terms the Company’s holdings can be split into three broad categories: income generators, subordinated financials and more speculative, credit intensive positions. The first two categories account for around 85% of the portfolio with the credit intensive allocation making up the remainder. At a sector level this means that subordinated financials remain the portfolio’s largest allocation. Banks have significantly rebuilt their balance sheets since the global financial crisis and the sector offers, what we believe is, an attractive level of income. The ICE BofAML CoCo index, for example, had a yield of 6.3% as at 31 March 2019. Outside of the financial sector, the largest holdings are in the telecoms, food and utility sectors.

During the period under review, the Company’s NAV total return was +1.9% with income helping to cushion against price volatility. The portfolio entered the period with gross borrowings of 18%. This was increased to 21% by 31 March 2019.

Outlook

Despite the rally year-to-date, the premium over government bonds that high yield companies need to pay to borrow remains higher than it was a year ago. Moreover, the more dovish backdrop has re-ignited the search for yield and investor demand for new issues is very strong. That said, the overall level of yield has fallen back towards recent averages and so we must expect the strong gains we enjoyed in the first quarter of 2019 to moderate from this point.

Since the end of the review period, high yield markets initially continued to rally, with European currency high yield spreads touching a low of 366bps. A number of factors helped drive this: improving relations between the US and China; stronger economic data; record highs for the US stock market and a continued dovish sentiment from central banks. However, sentiment reversed in May following a re-emergence and escalation of trade tensions between the US and China; additional tariffs aimed at Mexico; souring Italy – EU relations and weaker economic data. Risk assets, including high yield suffered and spreads widened back out to 446bps. Government bond yields fell sharply as markets started to price in the chance of US interest rate cuts, a far cry from market expectation of just six months ago. Companies that reported weaker than anticipated results saw quite significant repricing. With yields and volatility increasing in recent weeks we have found a number of opportunities to add some bonds to the portfolio at more attractive levels. The portfolio maintains a good level of liquidity to take advantage of any further repricing.

Paul Read/Paul Causer/Rhys Davies

Portfolio Managers

7 June 2019

Principal Risks and Uncertainties

The principal risk factors relating to the Company can be summarised as follows:

– Investment Policy – the adopted investment policy and process may not achieve the Company’s published investment objective.

– Market Risk – a fall in the stock markets and/or a prolonged period of decline in the stock markets relative to other forms of investments will affect the performance of the portfolio, as well as the performance of individual portfolio investments.

– Investment Risk – the investment process employed by the Manager is likely to result, from time to time, in a more concentrated portfolio than those of other investment funds.

– Foreign Exchange Risk – the movement of exchange rates may have an unfavourable or favourable impact on returns as the Company holds non-sterling denominated investments and cash.

– Shares – share price is affected by market sentiment, supply and demand for the shares, dividends declared, portfolio performance as well as wider economic factors and changes in the law. The market value of, and the income derived from, the Company’s ordinary shares can fluctuate and may go down as well as up.

– Gearing Returns Using Borrowings – net borrowing may not exceed 50% of shareholders’ funds. Borrowing levels may change from time to time in accordance with the Manager’s assessment of risk and reward. As a consequence, any reduction in the value of the Company’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to adversely affect the Company’s share price). The Company borrows principally using repo financing arrangements. In certain circumstances it may have to realise investments at short notice to repay amounts owing under those arrangements and may not be able to realise the expected market value of those assets.

– High Yield Corporate Bonds – corporate bonds are subject to credit, liquidity, duration and interest rate risk. Adverse changes in the financial position of the issuer of corporate bonds or in general economic conditions may impair the ability of the issuer to make payments of principal interest or may cause the liquidation or insolvency of the issuer.

– Derivatives – the Company may enter into derivative transactions for the purpose of efficient portfolio management. The Company will not enter into derivative transactions for speculative purposes.

– Reliance on External Service Providers – failure by any service provider to carry out its obligations to the Company could have a materially detrimental impact on the operation of the Company and affect the ability of the Company to successfully pursue its investment policy. The Company’s operations and reputation could be affected if any of its service providers suffered a major cyber security breach.

– Regulatory – whilst compliance with rules and regulations is closely monitored, breaches and changes could affect returns to shareholders.

A detailed explanation of these principal risks and uncertainties can be found on pages 13 to 16 of the Company’s 2018 annual financial report, which is available on the Company’s section of the Manager’s website at:

www.invesco.co.uk/enhancedincome

In the view of the Board, these principal risks and uncertainties are as much applicable to the remaining six months of the financial year as they were to the six months under review.

Going Concern

The half-yearly financial report has been prepared on a going concern basis. The Directors consider that this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. In considering this, the Directors took into account the Company’s investment objective, risk management policies and capital management policies, the diversified portfolio, the liquidity of the securities which can be used to meet short-term funding commitments, and the ability of the Company to meet all of its liabilities, including its repo financing, and ongoing expenses from its assets.

RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER

Under International Financial Reporting Standards, the Company has identified the Directors as related parties. Transactions with Directors are limited to their remuneration. Transactions with the Manager comprise management fees. The basis of these has not changed from that reported in the latest annual financial report.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

in respect of the preparation of the half-yearly financial report

The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and International Financial Reporting Standards.

The Directors confirm that to the best of their knowledge:

– the condensed set of financial statements contained within the half-yearly financial report have been prepared in accordance with the International Accounting Standards 34 ‘Interim Financial Reporting’;

– the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules; and

– the interim management report includes a fair review of the information required on related party transactions.

The half-yearly financial report has not been audited or reviewed by the Company’s auditor.

Signed on behalf of the Board of Directors.

Kate Bolsover

Chairman

7 June 2019

BOND RATING ANALYSIS

at 31 March 2019

Standard and Poor's Ratings, investment grade is BBB– and above

The definitions of these ratings are set out on page 69 of the 2018 annual financial report.

INVESTMENT PORTFOLIO

at 31 March 2019

All investments are fixed interest bonds unless otherwise stated; floating rates notes are depicted by FRN.

Bonds and Equity Investments

CONDENSED STATEMENT OF CHANGES IN EQUITY

CONDENSED BALANCE SHEET

Registered number 75059

 CONDENSED STATEMENT OF CASH FLOWS

CONDENSED STATEMENT OF COMPREHENSIVE INCOME

The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards, as adopted by the European Union. The profit after taxation is the total comprehensive income and therefore no statement of comprehensive income is presented. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the company. No operations were acquired or discontinued in the period.

Notes to the Condensed Financial Statements

1. Basis of Preparation

The condensed financial statements have been prepared using the same accounting policies as those adopted in the 2018 annual financial report. They have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives and in accordance with the applicable International Financial Reporting Standards (IFRS), as adopted by the European Union and, where possible, in accordance with the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014, as updated in February 2018.

2. Income

3. Management and Performance Fees

For the period 1 October to 31 December 2017, a management fee of 1.0% on the first £80 million of net asset value, 0.7% on the next £70 million and 0.6% on any excess over £150 million was payable.

With effect from 1 January 2018, under a new investment management agreement dated 27 June 2018, a management fee of 0.8% on the first £80 million of net asset value, 0.7% on the next £70 million and 0.6% thereafter, is payable. In addition, performance fee arrangements were also removed with effect 1 October 2017. The deferred performance fee arising in the year ended 30 September 2017, continues to be recognised as a provision of £306,000 as at 31 March 2019 (30 September 2018: £306,000).

4. Taxation

The Company is subject to Jersey income tax at the rate of 0% (2018: 0%). The tax charge consists of irrecoverable withholding tax on overseas income.

5. Dividends Paid

The first interim for the quarter ended 31 December 2018 was paid on 31 January 2019 to Shareholders on the register on 4 January 2019. The second interim for the quarter ended 31 March 2019 was paid on 30 April 2019 to Shareholders on the register on 5 April 2019.

6. Movements in Share Capital

There have been no shares issued during the period. The average price of the shares issued in the year to 30 September 2018 was 79.32p.

1,075,000 shares have been issued subsequent to the period end at an average price of 73.92p.

7. Classification under Fair Value Hierarchy

Note 20 of the 2018 annual financial report sets out the basis of classification as set out by IFRS 7 ‘Financial Instrument Disclosures’. No Level 3 items have been held during the period or at the period end, and the total (not shown) is therefore the aggregate of Level 1 and Level 2.

At 31 March 2019 financial liabilities designated at fair value though profit or loss consisted of currency hedges totalling £174,000 (30 September 2018: no financial liability, see financial assets above) as Level 2 items.

8. Status of Half-Yearly Financial Report

The financial information contained in this half-yearly report, which has not been reviewed or audited, does not constitute statutory accounts as defined in Article 104 of Companies (Jersey) Law 1991. The financial information for the half years ended 31 March 2018 and 2019 has not been audited. The figures and financial information for the year ended 30 September 2018 are extracted and abridged from the latest published accounts and do not constitute the statutory accounts for that year.

By order of the Board

R&H Fund Services (Jersey) LimitedCompany Secretary

7 June 2019