The fallout from the sub-prime disaster has hit Australian high yield and credit-related funds hard, according to Morningstar consultant Sallyanne Cook.
Widening credit spreads in the United States, as more institutions confessed to large sub-prime-related losses, resulted in poor November returns for high yield and credit-focused funds.
"Even top-shelf AAA-rated corporates offered no protection in what many fund managers are calling the worst month ever for credit markets," Cook said.
"The free lunch offered by credit investing over the last few years has come to an abrupt halt in 2007."
She said high yield and credit-related funds that held banking stocks had suffered most as global instability in the sector, in the wake of write-downs for US banks, impacted on Australian performance.
"Even Australian bank spreads moved wider, despite not being affected directly by sub-prime losses," she said.
"Hybrid securities as well as high credit quality asset-backed and mortgage-backed securities were also casualties of spread widening, which dragged down the performances of many enhanced income and hybrid funds.
"Domestically numerous Australian credit-focused funds lost ground, reporting negative returns for the month."
According to Morningstar data, the two worst-performing funds in the local market for the year to November 30, 2007, were Principal's Global Strategic Income Fund, which returned -3.43 per cent.
This was followed by BlackRock's Merrill Lynch Monthly Income Fund, which took a big dive in November to be up just 0.49 per cent for the year.
Challenger's high-profile High Yield Fund has also had a disappointing year, losing 0.39 per cent for the month to return only 1.86 per cent for the year to November.
Cook said recent downgrading of credit issues by credit ratings agencies had exacerbated the situation.
"This combined with the end of the calendar year and the end of financial year for many companies around the globe could see enhanced yield and credit funds continue to haemorrhage for the remainder of 2007," she said.
"In regards to the outlook for 2008, given the magnitude of the moves in spreads it is likely that it will take some time before these credit funds recover."
