Barbados’ credit rating descent from investment grade to junk territory has had a negative effect on mutual funds operated by a leading investment company.
Royal Fidelity assistant vice president, Jillian Nunes, said there was “great concern” about “the slippery slope [Barbados’] sovereign debt rating has found itself on”.
She told the company’s latest investor’s forum held at Hilton Barbados last week that following average annual return of six per cent the firm’s income fund “began to experience a below benchmark return for the first time this year”.
Nunes also reported that a decline in the Royal Fidelity growth fund performance and said her organisation’s response to the negative fallout from Barbados’ downgrades would be to diversify its portfolio.
“The income fund had produced some of the best returns in the market for the five years since its inception and an average annual return of six per cent until we began to experience a below benchmark return for the first time this year,” she said.
“Downward changes to the country’s credit rating have significant implications for the fund, since non-investment grade assets are viewed as less credit worthy and are usually associated with higher yields to compensate for the perceived higher risk levels.”
Nunes said there was “an inverse relationship between the value of a bond and interest rates”, noting the usual result was “unrealised losses when interest rates increase and the opposite unrealised gains when interest rates decrease”.
“In addition, higher risk sovereign debt may not be suitable for some investors who are unwilling to venture into speculative grade bonds. As a matter of practice, the fund avoids this level of risk.
However, the decline in the credit rating of Barbados has negatively affected the fund’s current holdings and as a result its recent performance,” she said.
Nunes also told the audience that given the challenges in Barbados, Royal Fidelity would change its focus.
“As you would no doubt expect, our fixed income focus has now shifted outside of Barbados, along with our equity focus, and as was true for the fixed income fund, we continue to diversify this fund geographically to protect against any future events,” she said.
