Credit fund performance and flows in 2013 are unlikely to reach the levels seen in 2012, says Fitch Ratings.
In a new sector update on high yield (HY) and investment grade (IG) funds, the agency notes that liquidity from central banks' actions and a reduction in eurozone systemic risk in H212 provided strong technical support to credit markets, resulting in double-digit performance for all credit fund categories.
Higher beta corporate credit funds (i.e. those with greater sensitivity to market movements) outperformed in 2012, notably European HY (25.5 per cent) and funds with allocations to European subordinated financials. Global HY funds returned a more modest 16.6 per cent and global IG corporate credit funds 12.7 per cent in 2012.
"Credit funds delivered double digit returns in 2012, fuelled by sovereign yield compression and credit spread tightening," says Alastair Sewell, firector in Fitch's Fund & Asset Manager Rating Group. "It seems unlikely that we will see this level of spread tightening again in 2013 and investors are increasingly concerned with the duration risk of bond funds in general. This will make it hard for long-only credit funds to match their 2012 performance and inflows."
Credit fund flows follow performance - 33 per cent of 2012 flows went to funds in the top five-year performance quartile. Contrary to the agency's findings for equity funds however, smaller credit funds are also attractive to investors.
While 30 per cent of net fund flows in 2012 went to the largest 30 per cent of credit funds, a long-tail of smaller funds also garnered substantial inflows, with the smallest 30 per cent of funds gathering 40 per cent of total flows in 2012. This reflects the appetite for more specialised, nimbler credit strategies that could be favoured in the coming years.
"It will be interesting to see how the largest funds navigate a less beta driven market and demonstrate agility," says Manuel Arrive, senior director in Fitch's Fund & Asset Manager Rating Group.
Corporate credit fund flows were exceptionally high in 2012 at USD150bn (2011: USD50bn), lifting four years flows to USD420bn and resulting in total credit assets under management (AUM) more than doubling over the past five years. Roughly two-thirds of total 2012 flow (USD95bn) went to HY and the balance to IG funds. Funds in the top performance quartile over five years received average inflows of around 33 per cent across the Lipper for Investment Management credit fund categories. This highlights the correlation between fund flows and performance at the fund as well as at the asset class level.
Credit funds have had difficulties beating the benchmark over three and five years. Navigating the risk on/risk off environment proved challenging, even more so for HY than IG funds. Over five years, 80 per cent of HY funds underperform the index, highlighting the difficulty in beating bullish markets.