Fitch Ratings says fund flows for credit asset managers have in general remained positive, as concerns about sovereign and bank debt and the economic outlook are balanced by generally sound corporate fundamentals.
"Despite an increase in investor risk aversion, inflows to credit funds have been positive. High yield and emerging market bond funds have seen particularly strong inflows," says Manuel Arrive, senior director in Fitch’s fund and asset manager rating group. "This reflects the attractiveness of carry returns in the current low yield, volatile environment."
In the third issue of its credit asset management quarterly newsletter, Fitch notes that corporate fundamentals have generally been improving despite overall credit spread widening.
However, there have been performance differentials between and within sectors. Fitch expects this situation to persist, with different sectors experiencing rating outlook stabilisation at different rates. Identifying and trading on these differentials remains a priority for credit asset managers.
Generally weak credit spread performance and volatile market conditions since the last publication of this newsletter (June 2010) were driven by increased macro-economic uncertainty and a perceived resurgence of systemic risk.
Credit asset managers remain focussed on weaker sovereigns and related/exposed banks, reducing or exiting positions, or managing risk through shorter duration instruments.
"An important challenge for credit asset managers at the moment is navigating the "risk-on, risk-off" mentality that is prevalent in the markets," says Alastair Sewell, associate director in Fitch’s fund and asset manager rating group. "Nonetheless, most managers Fitch spoke to continue to share the agency’s view that the recovery will continue, albeit at a slower rate."
In addition to a wider market analysis the updated newsletter presents an article discussing how corporate funding diversification is driving specialist loan managers towards high yield bonds. Fitch’s research shows that many specialist leveraged loan managers are considering diversifying into high yield, noting that this move would require the hiring of high yield specialists and implementation of governance procedures.
In another segment on investor sentiment, Fitch finds that market participants are considerably more accurate in forecasting investment-grade than high yield spread movements. This stresses the importance of the top-down component of the investment process for investment-grade and the bottom-up component for high yield managers.
