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The stressful world of the credit fund manager

Investing in credit need not be rocket science. But it definitely requires something more than a dartboard approach. At a time when funds are pouring into Europe's fast-growing credit markets - and when returns are high but so are volatility and the frequency of credit shocks - investors are finding that success in the credit arena boils down to three things: diversification, specialization and, above all, intensive and constant research.

These are heady times for European credit fund managers: hairy at times, and sometimes plain scary, but undeniably exciting.

The supply of non-government bonds is growing fast - offering an ever-widening array of names, sectors, ratings, issue types and maturities. Demand is growing even faster, with investors seeking new asset classes and chasing yield after two years of dismal equity market performance and low returns on government bonds. And all the while the frequency and severity of credit shocks are rising too - creating almost daily opportunities for bondholders to get burnt in what are still relatively new markets.

"Last year was a very rewarding one for credit, but it was also a very tough year," says Paul Lavelle, fund manager at US investment house Fidelity's London office. "If you avoided the land mines, you did real well. If you were caught out, you were badly hurt. The message is clear: don't play with credit. Get a specialist fund manager."

The collapse of Enron, which went from being a high triple-B credit to an unsellable bankrupt within a month, was just the most spectacular in a string of events that have shaken the credit markets.

Investors and analysts are forecasting plenty of credit shocks to come - both among investment-grade names and in the high-yield sector - and the much-criticized ratings agencies are on high alert.

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