Wanted: Bond Manager (New Skills Required)

Higher conviction and more defaults, the “new normal” for fixed-income investors.

(October 3, 2012) — Liquidity and duration have become increasingly tough for fixed-income funds to manage over the past 12 months, as investors hunting yield have turned to bond markets that are running dry of good supply.

The influx of investor cash to fixed-income funds, which began at the onset of the financial crisis and has steadily continued, has been a double-edged sword for some managers, research from S&P Capital IQ has found.

While assets under management have grown across the sector, portfolio managers have had to take more steps to ensure that what they are putting in their funds is going to perform in an ever-more tricky market.

A report from S&P Capital IQ said: “Managers need higher conviction when buying credits, as the likelihood of holding to maturity has increased.”

Already poor liquidity has not improved over the last 12 months, the research firm said, yet managers have had to find more assets as inflows continue. The Investment Management Association’s figures show at the end of June fixed-income assets, across institutional and retail funds, were up 11.5% on a year before.   

The research firm said: “In this environment of poor liquidity some managers have been holding a higher level of cash and gilts. Yields have decreased along the curve, which has helped prop up performance for many funds that were using gilts to manage duration. Many managers bought index-linked gilts as there was more value in them.”

Managers have hunted several sectors to find high-returning assets with many looking at high yield – a sector which has been a rollercoaster ride over the past 12 months, experiencing several peaks and troughs.

“Most managers see good opportunities in the high yield sector,” S&P Capital IQ said. “But all the managers we spoke to agreed that defaults are likely to rise.”

Flows into fixed-income funds had been growing steadily since 2008, according to data from market monitor EPFR. This year has seen the highest cumulative flows into the sector since the onset of the financial crisis.