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Saturday, 19th September 2020
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Assistance for treasurers with volatility ratings for European bond funds domiciled in Dublin Back  
Standard & Poor's Fund Services have recently introduced a bond fund volatility rating scale in Europe to help investors judge the risk that changing market conditions pose to their fund holdings. The new scale was added to the existing credit ratings of each bond fund, and 55 fixed-income funds managed across Europe have thus been assigned a volatility rating, with the Dublin offshore fund center alone hosting 12 of them.

Peter Jeffreys, managing director of Standard & Poor's Fund Services has said that the extreme stock market volatility around the world has led many European investors to put more of their money into money market and bond funds, theoretically safer havens. Nevertheless, the potential for loss in value of European bond fund investments should not be underestimated. European Monetary Union has led to lower-yielding fixed-income markets in Europe overall, but fund investors are reluctant to relax high performance targets according to Jeffreys. He believes that fund managers often increase a fund's exposure to lower credits or longer maturities in an effort to outperform, resulting in additional risk.
Stephanie Mery, associate director agrees that the increasing complexity of European fixed-income securities and markets has made it very difficult for investors to measure the risk or potential variability of bond fund values. Accordingly, the bond fund volatility ratings have been designed to help investors evaluate funds' risks as measured by volatility of returns.

The new volatility ratings are designed to rank bond funds according to their degree of exposure to share price and return volatility factors. The volatility ratings scale ranges from 'S1' (lowest sensitivity) to 'S6' (highest sensitivity).

The volatility ratings are based on an analysis of a fund's historical return volatility and its portfolio-level risk, including interest rate risk, currency risk, credit quality, liquidity, concentration, call and option risks. The rating analysis also factors in the effects of various portfolio strategies such as the use of leverage, hedging, and derivative instruments.
€By conducting fund volatility analysis, the aim is to uncover risk sources in a managed fund's portfolio and investment strategies, and to assess their potential impact on the fund's rate of return and net asset value variability,€ Ms. Mery said.

The volatility profiles of the first four categories ('S1' to 'S4') are measured and expressed relative to established government indices with different maturity bands, and provide investors with market benchmarks for risk and return comparisons. The €S5€ and €S6€ volatility ratings are assigned to funds that may be exposed to a variety of significant risks, such as investments in complex structured and/or illiquid securities, high leverage, as well as to funds with highly speculative strategies.

The rated Irish offshore bond funds show varying levels of sensitivity to risk and this is reflected in their volatility ratings, which are widely spread over the volatility rating scale. Indeed, the ratings of the Dublin-domiciled bond funds range from €S1€(lowest sensitivity) to €S6€(highest sensitivity) as outlined in the table below. For instance, the Lazard Sterling Reserve Fund, which is rated €S1€ possesses low sensitivity to changing market conditions. This fund currently has an actively managed portfolio of highly rated and liquid fixed-income securities, such as gilts and certificates of deposits, and is not exposed to currency risk. Its investment policy restricts the portfolio€s duration to a maximum of one year. This fund possesses an aggregate level of risk that is less than or equal to that of a portfolio comprised of government securities maturing within one to three years and denominated in the base currency of the fund.

In the €S4€ rating category, the Lazard Diversified Bond Fund is a global bond fund denominated in US Dollars and exposed to currency risk. The investment policy permits the fund€s duration to differ from the Salomon World Government Bond Index (currently 5.67 years) by up to one year. This fund possesses an aggregate risk that is less than or equal to that of a portfolio comprised of government securities maturing beyond 10 years and denominated in the base currency of the fund. Funds with an €S4€ volatility rating possess moderate to high sensitivity to changing market conditions.

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