Fund managers have adopted a more cautious tone on credit as spreads have approached historic levels, according to Morningstar’s Fixed Interest Sector Wrap.
Morningstar said it allocated its highest-possible analyst rating of gold to PIMCO Australian Bond while further 19 funds were designated silver and 20 bronze.
Five strategies that were upgraded to bronze from neutral, included Payden Global Income Opportunities, UBS Income Solution and FirstChoice Fixed Income, as well as both the unlisted fund and exchange-traded versions of Vanguard International Credit Securities Index.
Another two strategies, BT Fixed Interest and Kapstream Absolute Return Income, were downgraded to neutral from bronze.
Morningstar also initiated coverage of Legg Mason Western Asset Australian Bond at silver, AllianceBernstein Dynamic Global Fixed Income at bronze, iShares Core Global Corporate Bond ETF at bronze and JPMorgan Global Strategic Bond at neutral.
The report also found that more flexible bond strategies could better handle periods of rising interest rates than traditional counterparts, given comparatively short duration.
However, greater leeway could work both for and against the investors and they might be less tolerant of significant underperformance ion their core allocations than in supplementary strategies.
At the same time, unconstrained bond strategies tended to favour taking credit risk over interest rate risk while stresses in credit and equity markets tend to coincide, and a moderate amount of low-grade bond exposure would still appear to be appropriate in a core bond allocation, the firm said.
“Our conservatism favours a supporting role in most instances, but regardless, investors need to be conscious of and comfortable with the potential biases in their overall portfolio from this decision,” the firm said.
Morningstar’s Fixed Interest Sector Wrap covered 63 strategies across unlisted and exchange-traded funds.
