11.5.2011
By Simon Miller
European mutual funds are becoming more responsible for short-term volatility in credit makets as they increase their investments in credit assets to around €1trn according to research from agency Fitch Ratings.
Although European insurance companies hold around double the amount of private debt assets, mutual funds have become a driving force in credit markets, as they represent a much greater proportion of daily market activity. However, insurers' decisions will continue to influence
structural changes in demand for and the pricing of credit, according to Fitch.
Aymeric Poizot, senior director and head of Fitch's EMEA Fund and Asset Manager team said: "Specialised credit funds have become more popular, with EUR120bn of net sales in 2009 and 2010 and 30% of funds launched in the past three years, according to Lipper data. The €7bn mutual fund segment is a sizable capital pool for the European credit market".
The European mutual fund industry's €1trn of credit investments is held in bond funds and the bond portion of balanced funds and compares with total European mutual fund assets of over €7trn.Within bond funds, about 800 funds dedicated to investment grade and high yield credit
represent approximately €300bn, according to Lipper FMI.
Fitch estimates that another €700bn is invested in generalist bond funds and balanced funds. Credit funds mainly track indices (such as IBoxx, BoA Merrill Lynch or Barclays) but benchmark-free products are gaining
momentum, reflecting investors' appetite for absolute return and a questioning of the relevance of outstanding based indexes.
European insurers hold about €2trn of private debt, while pension funds hold €500 bn.
Insurance companies are the most prominent European investors in private debt, given the sheer size of their portfolios (€5.5trn excluding unit-linked investments), of which approximately 75% is invested in bonds, compared with. 45% at pension funds.
"Whether it is driven by tactical decisions or regulation such as Solvency 2, any reallocation to or within credit portfolios by European insurers is likely to weigh on the demand and pricing of private debt," says Monica Insoll, managing director in Fitch's Credit Market Research group.
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