UBS credit strategists Stephen Caprio and Matthew Mish ponder the question of whether mutual fund, managed account and foreign ownership of US corporate credit presents a reason to expect more volatility during the next bout of
volatility risk-off behavior than usual. It’s probably a question on a lot of minds right now.
The strategists note that mutual funds (including ETFs) have become bigger in the asset class as have foreign holders. Both of these categories represent less sticky money that is more prone to sudden flight when prices fall. This is that “non-traditional” funding you’ve been hearing about, aka shadow banking.
A substantial 70% of the US HY bond market ($922bn) is held by funds and separately managed accounts. In addition, mutual funds alone (which arguably face greater illiquidity mismatches than SMAs) hold the largest amount of US HY exposure across fund types, at $405bn of AUM (31% of the HY market).
Fund and SMA concentrations in US high-grade ($2.7tn, 46% of the market) and US bank loans ($410bn, 50% of the market) are nothing to sneeze at; however these clusters are mitigated somewhat. More AUM in both markets is skewed to separately managed accounts, which will not suffer from first-mover redemption risk (by definition, they are managed on behalf of one investor), and where liquidity is not always promised on a daily basis.
Who are the remaining holders of these credit markets that we do not capture? These would be investors allocating to corporate bonds outside funds. These include insurance companies and pension funds, CLOs, ETFs, and hedge funds/private equity firms.
Josh here – You’ll note that mutual funds and SMAs now own 70% of the junk bond (HY) market. That’s the itchy trigger finger that could set off a bigger reaction elsewhere in the fixed income market.
Fund-Heavy: The Owners of US Credit
UBS – October 25th 2016