Standard & Poor's Default stats - what do they tell us? - Perpetual's Greg Stock

May 8, 2012 - Standard & Poor's recently released their 2011 Annual Global Default Study and Ratings Transitions Report, which details its ratings activity around the globe, including defaults as well as ratings upgrades and downgrades.

The report highlights that in 2011 there were 53 defaults from the universe of rated entities, a default rate of 0.75% (investment grade and non-investment grade combined). Defaults declined from 81 in 2010, a default rate of 1.15%, as conditions continued to recover following the GFC in 2009 when they hit an all-time high of 265, a default rate of 4.06%.

Last year ratings upgrades slightly outnumbered downgrades, but sovereign downgrades, especially the US downgrade, led to a number of lower ratings for financial institutions.

Despite weak economic conditions in Europe and the United States, there was only a single investment-grade default in 2011 and it was not in Australia. In a volatile year, the low global default rate of 0.03% for investment-grade securities continued to prove their capital stable nature.

This suggests two important things for investors. Firstly, if you're looking to protect your capital, investing in investment-grade securities is shown to be a statistically safe way to diversify holdings and recession proof investments.

Secondly, if you're seeking the higher returns that below-investment-grade securities offer, detailed analysis and diversification are key to minimise the risk of selecting an entity that defaults.

This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. The views expressed in this article are the opinions of the author at the time of writing and do not constitute a recommendation to act. Any information referenced in the article is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor's capital.