Taxable Fixed Income. Invesco Floating Rate Fund (AFRAX)

Transcription

1 Taxable Fixed Income Invesco Floating Rate Fund (AFRAX)

2 Senior Secured Loans A unique asset class Floating rate funds, also called senior loan funds, invest in senior secured loans. The loans have very short duration and the coupon or interest rates are typically reset every 30 to 90 days. These loans are privately arranged debt instruments that provide capital to a company (usually below investment grade) and are issued by a bank or financial institution and syndicated by a group of banks to institutional investors. The loans are commonly issued in conjunction with a leveraged buyout, mergers or acquisitions. The company s payment of interest and repayment of principal on its loan is usually contractually senior to any other form of debt or equity. As a form of capital, senior secured loans are typically: Senior to the claims of other creditors Protected by performance-based and leveraged-based contracts or covenants Secured by collateral, such as property, inventory, equipment and intangibles We believe, this structure helps to reduce downside credit risk and maximize recoveries if a company faces difficulty. This unique asset class behaves differently from traditional fixed income investments. Floating rates. The rate of return for loans is usually determined by a fixed credit spread over the London Interbank Offered Rate (Libor). As interest rates (and Libor) move, the absolute return for the loan will self-adjust to changes in market interest rates. Returns on senior secured loans increase in a rising interest rate environment and decrease in a declining interest rate environment. Current income. Senior secured loans, like traditional bond funds, generate current income as companies pay their contractual interest on (at least) a quarterly basis. Senior and secured. With a senior claim, if the company faces financial hardship, the senior secured loan has a priority claim and is repaid first. Senior secured loans are typically secured by all the unencumbered assets that the company owns, making recovery, in the event of financial hardship, very likely. Senior standing, the hierarchy of corporate debt Senior secured loans sit at the top of the hierarchy of corporate debt. If a company should go into default, these loans hold first claim to the issuer s assets and earnings. In uncertain times, this positioning can add a level of reassurance to investors. Senior Secured Loans Are a Priority of Repayment in the Event of Default Senior secured loans rank highest in the capital structure High Priority Senior Secured Loans Bonds Preferred Stock Common Stock Low Priority Senior secured loans are secured by companies collateral such as: Inventory Property Plants and Equipment Payments Owed There is a risk that the value of the collateral required on investments in senior secured floating rate loans and debt securities may not be sufficient to cover the amount owed, may be found invalid, may be used to pay other outstanding obligations of the borrower or may be difficult to liquidate. 2

3 Risk Is Relative Distinct structure may help mitigate risk All investments involve some level of risk and, while frequently considered a safer investment vehicle, fixed income is no exception. Three major risks associated with fixed income investments are credit risk, interest-rate risk and liquidity risk. However, we believe the unique structure of senior secured loans typically helps mitigate credit and interest rate risks and the growing popularity of these loans has helped to reduce liquidity risk. Credit risk This is the risk that the issuer of the loan will fail to pay interest and principal in a timely manner. Since most senior secured loans are made to corporations with below-investment-grade credit ratings, they are subject to credit risk. However, their characteristics generally help mitigate this risk: Collateralization. Senior secured loans are secured by collateral which typically includes all of a company s assets including real estate properties, plant and equipment, and patents. First lien on the company s assets in the event of a bankruptcy. If a company defaults, senior secured loans are first in line to be repaid, which may result in a markedly higher recovery rate. Covenants. Senior secured loans are governed by a written contract that includes certain restrictions on the borrower designed to limit the default rate for lenders. Interest rate risk Interest-rate risk refers to the tendency for fixed income prices to decline when interest rates rise. For senior secured loans, interest rates and income are variable and their prices are less sensitive to interest rate changes than fixed income bonds. In general, senior secured loans have very short duration and the coupon or interest rates are usually adjusted every 30 to 90 days. Floating Rate Loans 1 and Interest Rates What happens when interest rates rise and decline? Senior Secured Loans Traditional Fixed Income Rising Interest Rates Declining Interest Rates Income Prices Income Prices Will adjust to changes in interest rates Is fixed Less sensitive to changes in interest rates Adjust to changes in interest rates Will adjust to changes in interest rates Is fixed Less sensitive to changes in interest rates Adjust to changes in interest rates Liquidity risk This is the risk of having a difficult time selling an investment in the marketplace. The loan market has grown significantly in size and scale, and increased secondary trading volume has helped attract investors, thus offering more potential liquidity. $9.4 Trillion Corporate Credit (%) Senior Secured Loans 18 High Yield Bonds 15 High Grade Bonds 67 Source: Credit Suisse, Securities Industry and Financial Markets Association as of June 30, 2014 (latest available data) 1 Floating rate funds are a distinct segment of the fixed income market and are not an alternative to money markets or certificates of deposit. They are for clients who are looking to complement their traditional fixed income investments. Invesco Floating Rate Fund 3

4 The 90 Impact of Interest Rates Potential to outperform in low and rising rate environments Federal Funds Rate (%) Interest rates have a significant impact on most fixed income investments. In general, when interest 7 Loans: 12.64% rates rise, returns for traditional bond funds usually decrease. However, senior secured loans behave 6 Bonds: 6.54% differently /04 6/06 Senior 3 secured loans provide a natural hedge against rising interest rates. They pay interest at a spread 2 2/94 2/95 over a floating base 6/99 5/00 rate (Libor) which means when rates rise, income payouts on senior secured 1 Loans: loans 10.38% typically increase Loans: as 3.93% well, unlike traditional fixed income investments. They also provide 0 Bonds: a potential 0.01% measure Bonds: of protection 2.11% against inflation. Historically, in rising rate environments senior secured loans have outperformed bonds, but may have underperformed during declining rate environments. Senior Secured Loans Outperformance During Rising Rate Environments Federal Funds Rate (%) /94 2/95 Loans: 10.38% Bonds: 0.01% 6/99 5/00 Loans: 3.93% Bonds: 2.11% 6/04 6/06 Loans: 12.64% Bonds: 6.54% Source: Federal Reserve, Lipper as of Dec. 31, Performance is cumulative and rising rates are defined as any period where rates increased at least 1%. Loan performance is represented by Credit Suisse Leveraged Loan Index and bond performance is represented by Barclays U.S. Aggregate Index. Unlike bonds, senior secured loans are secured by collateral, but are typically made to below investment-grade companies. The risk of default may be higher when compared to loans or bonds issued for investment-grade companies, but senior secured loans typically have a lower risk when compared to noninvestment-grade or high-yield bonds. Lipper 9 Category Asset Class Annual Returns (%) As 8 of Dec. 31, Type of Investment 1 Year 5 Years 10 Years Senior Secured Loans (Loan Participation Funds) Corporate Debt Funds A-Rated High Current Yield Funds Short Investment Grade Debt Funds Treasury Inflation Protected Securities Funds Citi U.S. 10-Year Treasury Index T-Bill 3-Month Index Source: Lipper as of Dec. 31, Continuously offered closed-end funds and open-end funds only. Investments in securities rated below investment grade present greater risk of loss to principal and interest than investment in higher-quality securities such as Government bonds and Treasury Bills. Senior secured loan rates may not immediately reflect changes in current interest rates because the rates on the loans are typically reset every 30 to 90 days. Past performance is no guarantee of future results. Index performance does not represent or predict the performance of any Invesco floating rate fund. Index performance does not include any expenses, fees or charges. It is not possible to invest directly in an index. See back for cover for definitions of each category and index. 4

5 Low Correlation Adds Fixed Income Diversification 1 Floating rate loans and other securities Senior secured loans have historically had a low correlation with other types of fixed income investments such as government, municipal, and investment-grade corporate bonds as well as equities. Incorporating floating rate loan funds in portfolios can complement other fixed income holdings and may help mitigate volatility in rising interest rate market environments. Correlation of Senior Secured Loans with Other Asset Classes History of the asset class July 2004 to December 2014 Move in the Opposite Direction Neutral Move in the Same Direction Barclays U.S. Government Intermediate Bank of America Merrill Lynch 3-Month U.S. Treasury Bill Barclays U.S. Aggregate Barclays Global Aggregate Bond ex-usd 0.06 Barclays U.S. Corporate Investment Grade 0.38 Barclays U.S. Municipal Bond 0.28 Barclays U.S. Corporate High Yield Index 0.85 S&P Credit Suisse Leveraged Loan Index 1.00 Source: StyleADVISOR July 2004 to December 2014 The Credit Suisse Leveraged Loan Index represents senior secured loans. Stocks are more volatile than bonds. High-yield bonds are subject to a higher level of credit risk than investment-grade bonds. The principal interest payments of Treasury bonds are guaranteed. Senior secured loan securities tend to be less liquid than the other asset classes listed. Diversification does not assure a profit or protect against a loss. Correlation is a statistical measure of how two securities move in relation to each other. Past performance cannot guarantee future results. For index definitions please see the back cover. 1 Diversification does not guarantee a profit or eliminate the risk of loss. Invesco Floating Rate Fund 5

6 Invesco Floating Rate Fund Take advantage of this unique asset class Using floating rate loan funds in investor portfolios Because of the variety and unique characteristics of floating rate loan funds, they can be used in many different ways within a client s portfolio. Alternative investments. Based on their floating rates, affiliation with leveraged buyout, mergers or acquisitions and low correlation to other asset classes. Help mitigate principal erosion. Their short duration, securitization by collateral and ability to potentially minimize losses in the event of default can help mitigate principal erosion. Income producing investments. The interest paid by borrowers is passed through to investors which may provide a steady income stream that keeps pace with rising interest rates. Fixed income diversification investments. Because their structure complements holdings in traditional bond funds. Consistency, continuity, quality, access With Invesco, you get both product and people consistency. Invesco Floating Rate Fund features: Product continuity One of the longest-tenured senior secured loan platforms in the industry. $29.3 billion assets managed across a broad senior loan platform. People continuity An experienced Senior Investment Committee averaging more than 20 years experience. 29 dedicated investment professionals supported by product management, operations, legal, compliance and IT. Consistent, continual investment process Our disciplined and fundamental credit research process. Team approach emphasizing our active management approach and long-term time horizon. We stress transparency and accountability throughout our investment process. Market access Our strong relationships and the level of assets under management provide investors with enhanced market access. Source: Invesco. Assets and employee data as of Dec. 31,

7 Invesco Floating Rate Fund Fund facts Investment objective The fund s investment objective is total return, comprised of current income and capital appreciation. Share Class Symbols A: AFRAX C: AFRCX Y: AFRYX Average Annual Total Returns (%) As of Dec. 31, 2014 Period Invesco Floating Rate Fund Class A Shares Inception: 5/1/97 at NAV Invesco Floating Rate Fund Class A Shares Inception: 5/1/97 With 2.50% Sales Charge Credit Suisse Leveraged Loan Index Quarter Year Years Years Years Since Inception Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher. Visit invesco.com for the most recent month end performance. Performance figures reflect reinvested distributions and changes in net asset value (NAV). Investment return and principal value will vary so that you may have a gain or a loss when you sell shares. Performance shown at NAV does not include applicable front-end sales charges, which would have reduced performance. Class A share performance reflects any applicable fee waivers or expense reimbursements. Had fees not been waived and/or expenses reimbursed in the past, returns would have been lower. The gross expense ratio is 1.11% for Class A shares. Expenses are as of the fund s fiscal year end as outlined in the fund s current prospectus. Portfolio managers Tom Ewald, Lead Portfolio Manager Tom Ewald joined Invesco in 2000 and was promoted to portfolio manager in Prior to joining Invesco, Mr. Ewald was one of the founding portfolio managers of First Union Institutional Debt Management and assisted in growing assets under management to more than $2 billion. Before joining Institutional Debt Management, Mr. Ewald worked for several departments within First Union Securities, Al-Ahli Bank of Kuwait and Barclays Bank PLC. Philip Yarrow, CFA, Portfolio Manager Philip Yarrow joined Invesco in 2010 as a portfolio manager. Prior to joining Invesco, Mr. Yarrow worked as a portfolio manager in the senior loan group and member of the group s investment committee at Van Kampen. Prior to that, he served as a credit analyst and a portfolio manager at Bank One/JPMorgan. Scott Baskind, Portfolio Manager Scott Baskind joined Invesco in 1999 and was a senior portfolio manager and Head of trading until 2012 when he was promoted to his current role of Co-Chief Investment Officer. Prior to joining Invesco, Mr. Baskind worked at Gleacher NatWest as an associate in the Leveraged Finance and Private Equities Group where he was responsible for credit analysis of non-investment grade bank loans and mezzanine debt financings. Before joining Gleacher NatWest, Mr. Baskind worked as a financial analyst at the Bureau of Fiscal Management, City of New York, then joined NatWest Markets as a commercial lending analyst. Invesco Floating Rate Fund 7

8 For more information Call your advisor or contact Invesco at from 7 a.m. to 6 p.m. Central time on weekdays. You can also visit us at invesco.com/us. Explore Intentional Investing with Invesco About risk An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer s credit rating. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. There is a risk that the value of the collateral required on investments in senior secured floating rate loans and debt securities may not be sufficient to cover the amount owed, may be found invalid, may be used to pay other outstanding obligations of the borrower or may be difficult to liquidate. The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Junk bonds involve a greater risk of default or price changes due to changes in the issuer s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods. Leverage created from borrowing or certain types of transactions or instruments may impair the fund s liquidity, cause it to liquidate positions at an unfavorable time or lose more than it invested, increase volatility or otherwise not achieve its intended objective. An issuer s ability to prepay principal prior to maturity can limit the fund s potential gains. Prepayments may require the fund to replace the loan or debt security with a lower yielding security, adversely affecting the fund s yield. The fund is subject to certain other risks. Please see the prospectus for more information regarding the risks associated with an investment in the fund. For US Use ONLY Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com/fundprospectus. After March 31, 2015 this piece must be accompanied by the most recent quarter end Invesco Floating Rate Fund Fact Sheet. Note: Not all products, materials or services available at all firms. Advisors, please contact your home office. Lipper Category definitions: Loan Participation Funds (Senior Secured Loans). Funds that invest primarily in participation interests in collateralized senior corporate loans that have floating or variable interest rates. Corporate Debt Funds A-Rated. Funds that invest primarily in corporate debt issues rated A or better, or government issues. High Current Yield Funds. Funds that aim at high (relative) current yield from fixed-income securities, have no quality or maturity restrictions, and tend to invest in lower-grade debt issues. Short Investment Grade Debt Funds. Funds that invest primarily in investment-grade debt issues (rated in top four grades) with dollar-weighted average maturities of less than three years. Treasury Inflation Protected Securities Funds. Funds that invest primarily in inflation indexed fixed income securities issued in the United States. Inflation indexed bonds are fixed income securities that are structured to provide protection against inflation. General US Government Funds. Funds that invest primarily in US government and agency issues. Index definitions: Barclays U.S. Government Intermediate Index represents intermediate-maturity government securities within the Barclays U.S. Aggregate Index. Bank of America Merrill Lynch 3-Month U.S. Treasury Bill Index represents an unmanaged market index of US Treasury securities maturing in 90 days that assumes reinvestment of all income. Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the US investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Barclays Global Aggregate Bond ex-usd Index represents a broad-based measure of the global investment-grade fixed income markets, excluding US securities. Barclays U.S. Corporate Investment Grade Index represents investment-grade corporate securities within the Barclays U.S. Aggregate Index. Barclays U.S. Municipal Bond Index represents a rules-based, market-value-weighted index engineered to track the broad US municipal bond market. Barclays U.S. Corporate High Yield Index represents an unmanaged index that covers the universe of fixed-rate, noninvestment-grade debt. S&P 500 Index is an unmanaged index of 500 common stocks generally representative of the US stock market. Citi U.S. 10-Year Treasury Index represents an unmanaged index tracking US Treasury securities with maturities between 1 and 9.99 years. T-Bill 3-Month Index. Tracked by Lipper to provide performance for the 3-month US Treasury Bill. Credit Suisse Leveraged Loan Index represents tradeable, senior-secured, US-dollar-denominated noninvestment-grade loans. Other definitions: Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. invesco.com/us FLREDU-BRO-1 03/15 Invesco Distributors, Inc. US2020