Diversified income funds make 'exceptional' comeback, says S&P

Standard and Poor's (S&P’s) Fund Services’ review of the international fixed interest sector revealed that while few international fixed interest funds were able to face up to the challenging market conditions in late 2008, diversified income funds came into their own in 2009.

The review of 22 managers and 111 funds showed diversified income funds came back from an “exceptionally poor” performance in late 2008 to achieve an “exceptionally strong” performance in 2009.

Another key finding was a growth in new credit-focused products, with particular attention on transparency, which appeared to meet investor demand.

S&P Funds Services analyst David Erdonmez said the dynamics at play in late 2008 were extremely testing, due to “widening credit spreads, a dramatic fall in liquidity, forced selling, emergency monetary policy settings and unprecedented levels of government intervention”.

“Although some managers positioned themselves correctly early on in the credit crunch (mid 2007), very few made it through the last half of 2008 unscathed,” he said.

Another key finding of the review was that bond funds were overweight in credit. It was revealed that funds with a core credit focus were not defensive at a time when investors expected them to be, although S&P noted that objectives and the way in which they are met must be understood when determining their role in an investor’s portfolio.

It was also found that currency hedging, including taxation treatment and hedging techniques, affected managers’ ability to maintain fund distributions, and that there was an increased use of derivatives, with credit default swaps common in portfolios.