Corporate Credit Funds Benefit from Safe Haven Status, Says Fitch

Fitch Ratings says in a sector update report that European investment grade (IG) credit funds have shown resilience in light of market volatility, outperforming equity funds by 11.2% over the period December 2010 to April 2012.

“Strong underlying corporate balance sheets and spread tightening has occurred as corporate bonds were seen as a relatively safe haven,” said Manuel Arrive, senior director in Fitch’s fund and asset manager rating group.

Investors have become more optimistic post Long-term Refinancing Operations (LTRO): money flowed into European corporate credit funds in Q112, reversing the outflows seen in H211. Year to date a total of around €8.3bn has flowed in to credit funds, with IG flows exceeding high yield (HY) fund flows by around €4.3bn. Flows turned slightly negative in April. Over the past two years, HY flows have almost equalled IG flows.

Flows reflect investors’ appetite for the asset class more than their belief in fund managers’ ability to dynamically manage market exposure. Indeed, fund performance has been inconsistent in recent years: no corporate credit fund that ranked in the top quartile from 2006 to 2009 remained in the top quartile from 2009 to date. By contrast weak performers from 2006-2009 actively moved up to the first and second quartiles in 2009-2012.

“The inconsistency in fund performance highlights fairly static risk profiles and the inability/unwillingness to dynamically manage market exposure,” said Alastair Sewell, director in Fitch’s fund and asset manager rating group. “Understanding a manager’s style and a fund’s detrimental or favourable market regimes is critical for investors.”

European IG corporate credit fund assets under management were around €200bn and HY around €35bn as of March 2012. The total numbers of credit focussed funds in Europe continues to rise, reaching just over 600 in April 2012. However, the 10 largest funds accounted for around a third of total credit fund assets under management.


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