Morningstar has completed research on the fixed interest sector and new ratings, which includes five ratings upgrades as well as two downgrades.
No ‘recommended’ strategies from the 2007 review were able to make the leap to ‘highly recommended’, Morningstar said.
Dimensional Five-Year Diversified Fixed Interest, Macquarie Income Opportunities, PM Capital Enhanced Yield, and UBS Diversified Fixed Income all moved from ‘investment grade’ to ‘recommended’ on the basis of improved conviction. BlackRock Monthly Income also moved from ‘on hold’ to ‘investment grade’.
There were also two major downgrades. “The biggest change was undoubtedly the downgrade of Putnam Worldwide Income from ‘highly recommended’ to ‘investment grade’,” Morningstar said. “Our loss of conviction was due to team cutbacks and, most importantly, recognition that the strategy is far more aggressive than we had been led to believe by Putnam in the past.”
Aberdeen Australian Fixed Income also moved from ‘recommended’ to ‘investment grade’ due to uncertainties surrounding Aberdeen’s acquisition of parts of Credit Suisse’s global asset management business in early 2009.
“Investing with a broad based fixed interest fund manager may help investors sidestep sector-specific jolts, but it’s far more important to understand and accept the risks borne when building a truly diversified portfolio,” Morningstar said. “It’s important not to take fund labels at face value, especially so in an asset class commonly thought of as defensive.”
Several high profile funds did not perform as their names would suggest in 2008 and 2009, and also did not fully describe the risks within the portfolios, Morningstar said.
“We found that most funds we previously designated core holdings performed as expected, largely protecting capital in 2008 but not participating in a major way in the 2009 rally, while the more concentrated and riskier vehicles we typically allocate our supporting player designation to were often those that suffered on the downside in 2008 but rebounded most rapidly in 2009,” Morningstar added.
