The increasingly complex trading strategies employed by fixed income managers mean many investors fail to understand the risks they are now taking, experts have warned.
The situation has been made worse by the introduction of Ucits III legislation, it is claimed. The new rules allow fixed income funds to invest in a wide range of derivative instruments, such as interest rate and credit default swaps. However, different managers are using these new powers in different ways, while others are not yet using them at all.
More confusingly, many smaller ‘off-benchmark’ positions are not big enough to be recorded on the fund fact sheet – even if the cumulative effect of these bets is significant. For example, some UK investment grade bond funds may have some exposure to high yield or overseas bonds.
‘The line between retail and wholesale fund management is blurring,’ said Justin Urquhart-Stewart of Seven Investment Management. ‘Within the retail market we are increasingly seeing a more institutional style of management.
‘If you don’t understand the process being used within these funds then either don’t invest at all or sub-contract the decision to someone who does.’
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