Favourable market conditions, namely liquidity from central banks’ actions and a reduction in eurozone systemic risk in the second half of last year, have been tailwinds for the asset class.
European high yield funds, and those with allocations to subordinated financials, performed particularly well – the former generated returns of around 25.5%. Global high yield funds returned 16.6%, while their investment grade counterparts yielded around 12.7%.
Alastair Sewell, director in Fitch’s fund & asset manager rating group, said: "Credit funds delivered double-digit returns in 2012, fuelled by sovereign yield compression and credit spread tightening.
“It seems unlikely that we will see this level of spread tightening again in 2013 and investors are increasingly concerned with the duration risk of bond funds in general. This will make it hard for long-only credit funds to match their 2012 performance and inflows."
Total inflows across global, European and US corporate credit mutual funds reached a record $150bn (£95bn), taking four-year inflows to $420bn, and contributing to the doubling of credit AUM over five years.
Popular fund strategies
Appetite for specialised, nimble credit funds was substantial in 2012, with the smallest 30% of funds attracting 40% of total inflows, reflecting the split between investors looking for broad credit exposure and those seeking smaller funds with more flexible strategies.
The largest 30% of credit funds attracted 30% of capital inflows in 2012, while funds in the top performance quartile accounted for 33% of inflows.
Fitch anticipates an increase in the number of short duration, unconstrained, absolute return or target volatility credit funds in the coming months, while funds that are flexible in both risk allocation and selectivity are likely to gain traction.
