The cash distributions generated by income funds may be more volatile than many have assumed, according to new research by Standard & Poor’s Ratings Services.

Standard & Poor’s has established benchmark stability ratings on many of the income funds in the market using publicly available information. S&P says the benchmarking effort was undertaken to ensure that all publicly assigned stability ratings hold consistent positions against peers in a given sector, as well as within the overall universe of income funds, and not just in comparison with those that happen to have public stability ratings.

In A Behind-the-Scenes Look Into Stability Ratings on Canadian Income Funds, S&P analyst Ronald Charbon says that the distribution of income fund ratings is more skewed toward the lower end of its ratings than many believe. There is a discrepancy been the distributions represented by current public stability ratings and the distribution represented by the pool of both public and benchmark stability ratings, he notes.

The reason for this is, “Simply stated, income funds may not be enthusiastic to obtain a rating that might be lower than the level some portion of the market might think would be applicable to the particular trust. In fact, the most stable funds are those with the most to gain from obtaining a rating.”

“Yet, as the market begins to mature, more and more funds will understand the value of transparency and an independent assessment and ongoing monitoring of their relative stability, leading to wider coverage of stability ratings, analogous to the development of the rating agency’s role in the bond market,” Charbon says.

“In addition, both retail and institutional investors increasingly demand that income funds are rated as a key input into their investment decision-making process. As stability ratings become more common, issuers will find that even a lower stability rating will have advantages over no rating in securing broad market access.”