Standard & Poor's has given frAAA status to four funds in its high income sector. A total of 57 high...
Standard & Poor's has given frAAA status to four funds in its high income sector.
A total of 57 high income funds, both UK domiciled and offshore, qualified inclusion in the peer group.
These included Barclays Sterling Bond Fund, a sub fund of the Jersey-domiciled open-ended investment company and Henderson Horizon Funds, a sterling bond fund which is a subfund of the group's Luxembourg domiciled Sicav.
The Henderson Preference and Bond Fund, a UK authorised unit trust, and Invesco GT Gilt Fund, a sub fund of Dublin IFSC domiciled umbrella unit trust, also achieved the frAAA rating.
This year's report takes account of the expanding choice of funds in the sector. For the first time it includes dollar and euro denominated vehicles, as well as the previous coverage of sterling-based funds.
Ten funds denominated in foreign currencies, either euro or US dollar, have been assessed, comprising five dollar-based funds investing in sub-investment grade corporate debt, two similar euro portfolios as well as three dollar-based global emerging market debt funds.
Ratings for four funds were raised. Apart from Invesco GT Gilt Fund attaining frAAA-rated status, Investec Global Strategy Fund Sterling Bond Fund and Investec GF Sterling Bond Portfolio both improved a rating band to frAA, based on continuing strong fund performance.
Meanwhile, Mercury High Income Bond Fund attained a new rating of frAA, reflecting its strong team backing and well-defined management process, according to Linda-Jane Coffin, director at Standard & Poor's Fund Services. Those which were downgraded from frAA to frA include the BGI Gilt & Fixed Interest Income fund, the M&G Corporate Bond Fund and the Schroder High Yield Bond Fund.
The M&G fund was downgraded because of the change in manager of the fund in April of this year. Anna Lees-Jones took over the management in April, and Coffin said that while ratings group had convincing evidence of her management capability in gilts there is no direct evidence of a track record in corporate bonds.
The Schroder fund has been downgraded due to recent underperformance. Coffin said: "Duration and yield curve positioning have proved positive for performance over the past 12 months, but relative returns have been let down by stock selection.
"Despite our high qualitative assessment of the team, strict application of our quants means that the underperformance relative to both benchmark and peer group causes the fund to slip a rating band to frA."
The BGI fund has also been downgraded due to underperformance.
The year to 1 May generally provided fairly meagre returns for bond fund investors as short-term dollar and sterling interest rates have risen, according to Coffin. Best results over the past 12 months came from the dollar based global emerging market debt sector.
She said: "With the exception of emerging market debt, gains in all other leading bond indices were restricted to less than 5% in local currency terms last year.
"In view of these fairly flat returns, many fund managers have increasingly been looking to strengthen their credit analysis capabilities to boost portfolio returns."
Emerging debt markets achieve a marked recovery, due to the fact there were no repeats of the Asian and Russian crises that dominated 1998. The level of recovery varied however with Eastern Europe and Latin America producing significantly better returns than Africa, Asia or the Middle East. The top fund in the sector marked up more than a 50% gain, while the average fund rose 15%.
The margin between top and bottom performers in the sector was more than 60 percentage points.
The UK market was less impressive. The best return by any sterling-denominated fund was under 8%, while the average performance for the three sterling sectors covering UK gilts, fixed interest stocks or a combination of both ranged between 0.5% to -0.4%.
By comparison, the FTSE All-Share index rose by 2.7%, but as an index it is not subject to transaction costs or management fees.
The other major development in this year's report is the inclusion of volatility ratings to give a better insight into each fund's sensitivity to changing market conditions, generally relative to the highest quality local currency government bonds.
Volatility ratings evaluate a fund's sensitivity against a variety of factors including interest rate movements, credit risk, investment concentration or diversification, liquidity and leverage.
Peter Fuller, director at Standard & Poor's Fund Services, said: "In such a heterogeneous sector, incorporating portfolios comprising sovereign bonds to emerging market debt, the addition of volatility ratings to this year's report for all funds should prove a further useful tool to compare fund risk profiles."
The highest volatility rating of S6 was given to only four funds, most of which invest in emerging market debt.
Four of M&G's bond funds were given ratings of S4, which signifies funds that possess moderate to high sensitivity to changing market conditions.
According to Standard & Poor's these funds possess an aggregate level of risk that is less than or equal to that of a portfolio of government securities maturing beyond 10 years and denominated in the base currency of the fund.
Other funds rated S4 included the Aberdeen Fixed Interest unit trust, Britannic Gilt & Fixed Interest and Perpetual Corporate bond.
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