The Investment Management Association (IMA) has warned funds in the £ Corporate Bond sector over excessive exposure to cash and non-core securities, Investment Week understands.
According to sources, the trade body has told managers who hold over 20% in cash and certain other securities they risk ejection from the sector.
The IMA sector definition stipulates a fund must invest at least 80% in corporate bonds rated BBB- or above. That weighting excludes hybrid assets such as convertibles, preference shares, and permanent interest bearing shares.
This may cause problems for bond managers looking at higher yielding corporate debt in a bid to boost income, buying hybrid debt such as covered bonds, and holding higher cash weightings.
Around half the funds in the IMA £ Corporate Bond sector have double-digit allocations to cash and non-core holdings, Investment Week analysis shows.
Furthermore, a quarter of funds in the sector have over 15% of their portfolios in cash and bonds rated below BBB- as of their latest disclosure dates.
It is understood the IMA has voiced concerns to individual managers over their cash and hybrid debt weightings.
Concerns over a liquidity squeeze in the corporate bond market may have affected managers’ cash weightings.
Last summer, the regulator asked fund groups to report on their ability to meet potential redemption requests from bond funds, given its fears over post-crisis liquidity levels.
Managers building cash buffers must still conform to separate IMA rules on ultra short-dated debt.
Announcing the results of its fixed income review in August, the trade body said it is maintaining a rule which means securities with a maturity of 0-3 months are treated as cash.
The IMA had previously consulted on other definitions of ultra short-dated bonds, including one based on the date of purchase.
“We are constantly reviewing funds in our sectors and having conversations with fund groups, but we cannot disclose the nature of these conversations,” an IMA spokesperson said.
Timeline of events
April 2012
IMA consults members over changes to fixed income sectors, including limiting exposure to asset backed securities and reviewing the classification of short-term bonds as cash.
Nov 2012
IMA reviews currency management in fixed income funds, with the view to tightening sector definitions.
May 2013
IMA opts against changing currency exposure rules for fixed income funds.
Aug 2013
IMA completes review of fixed income sectors, making changes to £ High Yield Bond, £ Strategic and Global Bond sectors and introducing a new Global Emerging Markets Bond sector from 31 December 2013.
