Lipper’s Jake Moeller examines changes in the credit composition of the Lipper – Bond EUR Corporates Sector.
Reuters/Thomas Peter
Flows into European corporate bond funds have remained buoyant into 2014 with over €800 million net flowing into the sector for the year 2014 to the end of April.
Throughout the course of the last 12 months (to the end of May 2014), there has been a slight increase in aggregate credit risk. The combined bucket of AAA, AA, and A rated instruments across funds in the sector has fallen 4.8% while the combined BBB, BB and B bucket has increased 2.65%. The BBB bucket with a 43% average exposure – is the most popular, followed by A with 29% and “Unrated” – with 9%.
The dispersion among individual fund credit buckets, though is marked. Pimco GIS Euro Credit E Eur Acc for example, has reduced its AAA bucket 28% and has increased exposure to AA, A and BBB 18%, 6.5%, and 5.5% respectively. Only three funds in the sector have increased their AAA exposure more than 5% with Aviva Investors European Corporate Bond A increasing 7.9% over the year. Several funds such as Morgan Stanley Euro Corporate Bond A EUR, Raiffeisen-Euro-Corporates R A and Nordea 1 – European Diversified Corp Bd BP EUR have made marginal changes of no more than 2% across credit buckets.
Table 1. Average Credit Bucket Holdings in Lipper Global – Bond Euro Corporates Sector (data to 31 May 2014).
Source: Lipper
The lowest end of the investment grade spectrum, BBB, remains the “sweet spot” for active bond fund managers; the average fund allocation to BBB holdings in the sector at the end of May 2014 was 43%. However, the sector is highly skewed. One fund for example – KBL EPB Bond Fund-Selected Inv Grade Corp Euro – has 88% of its holdings in BBB securities. Of the top 20 funds ranked by BBB exposure, only 5 have reduced exposure to this credit bucket in the last 12 months. Only 7 funds in a sector of 322 have less than 10% of their holdings in BBB rated securities.
Although this is only a high level snapshot of the current credit status of this sector, more detailed analysis reveals a high degree of differing concentrations within the investment grade spectrum. Investors need to examine carefully where their corporate bond fund is invested and what the mandate of the fund permits. Choosing a corporate bond fund on performance alone and without due consideration of the portfolio composition could result in unexpected concentrated exposures to a particular credit bucket.
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Disclaimer:
This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. We cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.
