Moody’s turns negative on bond funds

Moody’s Investors Service has maintained a stable outlook on asset managers, money market funds and closed-end funds in 2012 but the rating agency has changed its outlook on bond funds to negative.

Moody’s pessimistic view of bond funds is based on deteriorating fundamental credit conditions.

“Bond funds’ creditworthiness will come under pressure from the weakening macro environment and deteriorating sovereign and bank creditworthiness,” said Moody’s vice-president Vanessa Robert.

She said prices would remain volatile due to a number of risks including the changing economic outlook, political developments and deteriorating credit quality which cause swings in market sentiment.

Despite the worsening outlook for bond funds, Moody’s expects assets under management in these products to remain solid in 2012 amid global economic uncertainties and accommodative monetary policies.

Moody’s has taken a more positive view of asset managers, which it believes handled discretionary spending in the face of fluctuations in assets under management, fees and client flows in 2011 well.

Nonetheless the agency said 2012 is likely to be another volatile year for asset managers, with depressed global growth and economic uncertainty continuing to weigh on results.

“Disappointing returns and relatively high fees on actively managed products are causing investors to reconsider their allocations,” said vice-president Neal Epstein.

Epstein said well-diversified managers capable of fielding alternative and passive products will have competitive advantages.

He added mergers and acquisitions among asset managers could provide credit positive opportunities in this sector.

Money market funds weathered tough conditions last year and Moody’s is anticipating challenging conditions again in 2012 due to credit and market risks, a shrinking supply of eligible securities, historically low interest rates.

The prospect of regulatory reform is another potential hurdle for money market funds which, Moody’s said, could transform the sector into a floating-NAV product and/or impose capital requirements.

However, the agency expects high levels of liquidity, reduced exposure to European banks and increased investment in US government and AAA-rated European government issues to mitigate money fund credit and market risks. Its outlook for money market funds therefore remains stable.

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