Monthly Commentary August

GAM Star Credit Opportunities (USD)

August started with a flurry in Turkey and continued Trump trade-war language, which affected currencies and stocks more than credit. However, those concerns have dissipated to great extent and the fundamental attractiveness of our individual holdings took the foreground. This was backed up by strong growth in the EU, and quite dovish behavior from the European Central Bank regarding its forward guidance: it will maintain deposit rates at -0.4% up until September 2019, which is a supportive market backdrop for credit.

As a buy-and-hold fund that buys bonds rather than the market, what drives our returns over time is the credit strength of each individual company and coupon accrual.

On that score, the fund is benefiting from further reratings as the metrics of our high-quality issuers keep on improving and the results announcements for H1 2018 were almost all credit positive. Interest spreads, which have widened significantly recently are, in our view, well above fair value; they do not reflect the strong underlying credit quality of the portfolio, and can create not only a high income but also capital gains going forward. During the month, we participated in the new issue of the 7.75% Barclays contingent capital security which has a company call option, or interest reset, of five-year swap rates +4.84% after the fifth year. The issue was well received and is now trading up at 101%. As a further bellwether, we can highlight the price of 6.375% HSBC bonds which have an interest reset in 2024 of 4.368% above five-year swap rates, which now trades at just 99.9%.

The fundamental results of our companies, both banks and insurers, generally continue to show good progress in their multi-year process of capital strengthening. The income offered by our portfolio continues to provide an attractive return; the fund is also well positioned for an environment of somewhat higher interest rates by owning many fixed-to-floater bonds and some discounted floating-rate notes, as well as a number of high-coupon securities with relatively short issuer call dates. There remain a wide number of securities where it is possible to lock into attractive yields going forward. As investors return from their summer holidays, we expect them to focus on the yield our securities deliver, rather than unrelated political headlines.

GAM Star Credit Opportunities (GBP)

August started with a flurry in Turkey and further Trump trade-war language, which affected currencies and stocks more than credit. However, those concerns have dissipated to a great extent and the fundamental attractiveness of our individual holdings took the foreground. This was backed up by strong growth in the EU, and quite dovish behavior from the European Central Bank regarding its forward guidance: it will maintain deposit rates at -0.4% up until September 2019, which is a supportive market backdrop for credit. Concern over Brexit continues to dominate headlines, but the worries are being expressed mainly in the currency, and to some extent in equity markets, rather than in credit markets.

As a buy-and-hold fund that buys bonds rather than the market, what drives our returns over time is the credit strength of each individual company and coupon accrual. On that score, the fund is benefiting from further re-ratings as the metrics of our high-quality issuers keep on improving and the results announcements for half year 2018 were almost all credit positive. Interest spreads, which have recently widened significantly, are in our view well above fair value; they do not reflect the strong underlying credit quality of the portfolio, and can create not only a high income but also capital gains going forward. During the month there was not much trading beyond taking significant capital gains in our holding of 5.7% Prudential 2063 at 115% which gives a yield of 4.65% until its call date in 2043. The fundamental results of our companies, both banks and insurances, generally continue to show good progress in the multi-year process of capital strengthening.

The income offered by our portfolio continues to provide an attractive return and the fund is well positioned for an environment of rising rates as more than 50% of the portfolio is in fixed-to-floating and floating rate notes, as well as a number of high coupon securities with relatively short issuer call dates.

There remain a wide number of securities where it is possible to lock into attractive yields going forward. As investors return from their summer holidays, we expect them to focus on the yield our securities deliver, rather than unrelated political headlines.

 

GAM Star Credit Opportunities (EUR)

August started with a flurry in Turkey and continued Trump trade-war language, which affected currencies and stocks more than credit. However, those concerns have dissipated to a great extent and the fundamental attractiveness of our individual holdings took the foreground. This was backed up by strong growth in the EU, and quite dovish behaviour from the European Central Bank regarding its forward guidance: it will maintain deposit rates at -0.4% up until September 2019, which is a supportive market backdrop for credit.

As a buy-and-hold fund that buys bonds rather than the market, what drives our returns over time is the credit strength of each individual company and coupon accrual. On that score, the fund is benefiting from further reratings as the metrics of our high-quality issuers keep on improving and the results announcements for H1 2018 were almost all credit positive. Interest spreads, which have widened significantly recently are, in our view, well above fair value; they do not reflect the strong underlying credit quality of the portfolio, and can create not only a high income but also capital gains going forward. For example, 4.75% HSBC AT1 coupons are now priced at 98.8%, giving a yield of 4.95% to the call date in 2029, which represents a spread of 486 bps for an ‘A’ rated issuer. Another example is 4.75% Santander which now yields more than 6.8% to the next call date in 2025, with a spread of more than 700 bps. The fundamental results of our companies generally show good progress in their multi-year process of capital strengthening.

The income offered by our portfolio continues to provide an attractive return; the fund is also well positioned for an environment of somewhat higher rates by owning many securities that are fixed-to-floater, or already floaters, as well as a number of high-coupon securities with relatively short issuer call dates.

There are still a wide number of securities where it is possible to lock into attractive yields going forward.

As investors return from their summer holidays, we expect them to focus on the yield our securities deliver, rather than unrelated political headlines.

 


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4 August 2018

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