Performance drivers fade in credit funds, says Fitch
Credit funds face growing risk of investor redemption, amid uncertainty over the Federal Reserve's plan for tapering and disappointing returns as credit performance drivers see their role diminish, according to Fitch.
A new report also finds that repricing risk, which is linked to redemption, is also rising for credit funds.
Less than 10 per cent of credit fund flows since end-2008 have been reversed since June 2013, when financial markets were sold off globally. Redemption risk is particularly acute for large high yield (HY) retail funds, which provide daily liquidity and, in certain cases, own a substantial portion of select issuers.
Looking forward, credit fund managers have positioned their portfolios for a continued, gradual market normalisation, and, in the shorter term, for range trading markets, increased volatility around economic releases and central banks communications, and a potential increase in relative value opportunities fuelled by company-specific stories (M&A and share buybacks for example).
The current market, which is characterised by low yields, spreads and default rates, nevertheless leaves credit fund managers with limited room for exploiting credit performance drivers. Funds' future performance is constrained by limited potential for further spread compression, by the normalisation of relative value discrepancies (e.g. core and periphery, financials / non-financials, US / Europe) and by the fact that bond pricing variation between issuers remains low.
Overall global credit fund performance has been lacklustre in the year to date, as higher rates reduce overall total return. European HY funds, like in 2012, still stand out with the best returns (3.4 per cent year to 18 October). By contrast, USD investment grade funds suffered the most because of duration (-5.4 per cent). Absolute return credit experienced drawdowns during the sell-off in May-June which has left them in negative territory so far this year. Performance discrepancies between global credit funds increased in 2013 relative to 2012, highlighting differences in funds' overall exposures to credit and duration.
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