Invesco’s flagship leveraged loan fund has shed more than half its assets over the past year while ranking as the worst performing of its peers in the US, partly because of an outsized bet on the stock of a coal company.

The Invesco-Oppenheimer Senior Floating Rate fund has returned minus 2.7 per cent for its “class-A” shares over the past 12 months, a long way below the 5 per cent return of a benchmark index run by the Loan Syndications and Trading Association. So far this year it is down 1.6 per cent, while the index has gained 0.5 per cent.

The sub-par returns have been driven in part by the fund’s risky bets on equities including Arch Coal, a struggling coal producer based in St Louis, Missouri, raising questions about mutual funds that diverge from their core objective.

The Invesco fund owns close to a 20 per cent stake in Arch, whose share price is down more than 36 per cent this year and has more than halved over the past 12 months. The stake accounts for 3.4 per cent of the fund’s total assets and makes it the largest single investment by some distance, according to data from Morningstar.

“Something seems to be wrong here,” said Faris Chesley, chairman of Chesley, Taft & Associates, a registered investment adviser in Chicago. “You have a portfolio manager who looks to be off the ranch. Why this has been allowed to happen, I don’t know.” 

The fund’s run of poor performance has been met with an exodus by investors who have pulled almost $10bn from the fund since October 2018, cutting its assets under management to $6.6bn and slashing its ranking from the largest loan fund in America to number four by assets.

Invesco, which last year took over the fund from Oppenheimer, the rival firm it bought for $5.7bn, declined to comment. The fund’s lead portfolio manager Joe Welsh retired at the end of 2019 and has been succeeded by David Lukkes, who has worked on the fund since 2015. 

Many loan funds hold small stock positions, typically as a residue of debt that was exchanged for equity after a default. However, the Invesco fund is an outlier. In total, the fund holds 6.2 per cent of its assets in the equity market, compared with an average among its peers of 0.6 per cent, according to Morningstar. A loan fund run by Chicago-based Nuveen has the next highest equity position of any fund manager at 1.9 per cent of assets.

The Invesco fund has previously been criticised by Morningstar for its aggressive approach. The fund also holds more than twice the average number of loans rated below single B, deemed to be perilously close to default. 

The fund is not breaching any rules, and states in its prospectus that it may invest up to 20 per cent of its assets in “cash or other loans, securities and other investments”.

“We are entering this world with more products where people are not as aware of what they own,” said Gage Houser, president at Hutchinson Capital Management in Larkspur, California. “They look to a title to suggest what they are holding, but you have to go deeper.”



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