The Use of Credit Ratings in the Delegated Management of Fixed Income Assets

Investment mandates of fixed income funds constrain managers' portfolio decisions, often employing credit ratings to classify asset risk. We categorize U.S. and European fixed income funds' mandates using textual analysis and measure the use of ratings. Over the past two decades, despite the weaknesses of ratings revealed in the global financial crisis, ratings use has increased significantly. Since 2010, the fraction of funds not using ratings in any way has fallen by almost half in both the United States and Europe. By 2020, 94% of U.S. funds and 65% of European funds used ratings. These patterns fit agency based models of investment mandates and point to a lack of practically useful alternatives.

Automated summary

The investment mandates of fixed income funds often rely on credit ratings to classify asset risk, despite the weaknesses revealed in the global financial crisis. The use of ratings has significantly increased over the past two decades, with a decline in the proportion of funds not using ratings since 2010. By 2020, the majority of U.S. and European funds were using ratings, suggesting a lack of practical alternatives.