2013 Credit Investment Strategies More About Alpha Than Beta

Flexibility should therefore become a more important criterion for credit fund selectors’ investors.

"After four years of significant yield compression and massive investors’ inflows, there is a rising risk of repricing driven by nominal yields or liquidity withdrawal," says Manuel Arrive, Senior Director in Fitch’s Fund and Asset Manager team. "Therefore, funds that allow flexibility in risk allocation (to manage credit beta) and selectivity (to generate credit alpha) both on the long and short side should gain traction."

The sovereign component of credit yields is at a historical low while the spread component is at or just below long-term (16 year) average levels of 135bp and 630 for investment grade and high yield, respectively. This leaves traditional, longer duration credit portfolios relatively more exposed to a rise in nominal yields than in credit spreads.

"There has been a continuous trend towards less credit dispersion since 2004-2005. Yet, it is now bottoming up and we have even noted some pick up in relative high yield spread dispersion recently. Exploiting this dispersion, through bond picking, sector selection and relative value strategies should be better rewarded in 2013 than in the past four years." says Alastair Sewell, Director in Fund and Asset Manager team.

Fitch expects credit to remain an asset class of choice for institutional investors for regulatory and risk reasons. By contrast, with lower credit return expectations in 2013, performance driven investors in the private bank and third party distribution arena will demand renewed approaches in credit, to stay appealing relative to equity funds.

Fitch therefore expects more short duration, unconstrained, absolute return or target volatility credit fund launches.