As if there were not already enough obstacles facing fixed income investors amid anxiety over market illiquidity, research and ratings firm Fundhouse believes there is another twist in the knot.
“Funds that have wide ranging investment choices – strategic bond funds and multi-asset income funds – may well be sitting on some illiquid high-yield bond positions that could be past their sell by dates,” said Rory Maguire, Fundhouse CEO.
To elucidate on Fundhouse’s concern over high-yield investments’ susceptibility to investor sentiment, it is worth examining the comparative impact of the 2008 financial crisis on treasuries, investment grade and high-yield bond returns, as illustrated in the graph below.
Maguire outlined counterarguments put to them by fixed income fund managers, including higher leverage commonality in 2007/08, market illiquidity providing buying opportunities and the liquid composition of asset classes such as sovereign bonds, cash and credit default swaps.
However, in order to keep investors well-informed, the firm believes that illiquidity is an issue which ratings agencies need to bring to the fore when assessing and grading funds, with yield targets, fund size and stock selections among the areas that need to be slid under the microscope.
Maguire said: “We think it is sensible to engage with fund managers on the issue of bond illiquidity and understand whether their funds have any asset liability mismatches because of the illiquidity of what they own versus the daily liquidity of the fund.”
“The answer is always going to be a matter of judgment, but all we can do, as fund raters, is err on the side of caution and place funds under review when we see moments like this in the market.”
