UK - Institutional investors must be wary of the credit ratings attached to companies and perform their own due diligence before investing, fund managers claim.
The warning comes in the wake of the scandal at Italian dairy giant Parmalat, which has collapsed among allegations of fraud committed by directors and the firm’s auditors.
Parmalat – which held a triple-B stable investment grade rating from Standard & Poor’s before the scandal – is the latest in a string of corporate bond defaults, such as Enron and WorldCom, where a seemingly healthy issuer has collapsed suddenly.
Gartmore Investment Management head of credit research Karl Bergqwist (pictured) said aside from the fraud, investors would have realised that Parmalat’s “flaky” bonds were not investment grade if they had investigated them properly.
He added: “I’m very supportive of the rating agencies and the system because it brings discipline and transparency to the market. But you should never base investment decisions on their ratings. You need to do your own due diligence and see whether or not the risk profile of the particular ins-trument is suitable for the mandate.”
Scottish Widows Investment Partnership corporate bond manager Steven Logan said: “Investors think that because an agency has given a rating that due diligence has been performed. It’s not – it is backed up by differing degrees of disclosures. Any investor looking to agencies has to realise that they are not a policeman. The market’s got to be responsible for what it is doing.”
And Bedlam Asset Management founder Jonathan Compton said that any investor or fund manager that did not perform its own due diligence and instead relied on credit ratings to make investment decisions deserved losses when they occurred.
Compton said: “Enron was foreseeable if you studied its cashflows. Parmalat was foreseeable if you just looked at the dairy industry. Each time this comes along, people say ‘I couldn’t have known’. Of course they could.”
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