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New tools change face of fixed interest

Standard & Poor’s says the wider investment powers available to fixed-interest vehicles are changing the risk profile of the sector.

The fund ratings and research provider believes that although investors stereotypically view the asset class as providing static, unvaried returns, the uptake of Ucits III by some fund managers in the past few months and adoption of techniques used by institutional fixed-interest vehicles means that portfolios can be anything but predictable.

The powers offered by Ucits III include the opportunity to use derivatives, differ the types of alpha or make long/short bets to diversify returns.

S&P believes that as fund firms increasingly attempt to use uncorrelated trades to provide diversification by holding derivatives and other instruments, there are concerns this could lead to greater correlation to the market as fixed-interest funds increasingly move away from traditional bond strategies.

S&P fund analyst Kate Hollis says: “There is an increasing likelihood of this happening in the marketplace. A large toolbox might help enhance returns but also enhances the potential for things to go wrong. More alpha sources do not necessarily lead to better performance.”

She also says investors need more information on funds using these powers to enable them to match them to their risk profiles.

Hollis says: “It is not always easy to divine from factsheets, the prospectus and annual report precisely what new alpha sources and techniques a fund is resorting to.”

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