Monthly Commentary February

GAM Star Credit Opportunities (EUR)

The month of February saw a contrast between strong earnings from issuers held in the portfolio and negative price movements in many of our holdings driven not by fundamentals but instead by some “risk off” price adjustments prompted by equity markets experiencing a strong correction accentuated by a spike in volatility .

For this reason, the fund declined in value. An example was our holding of 4.75% HSBC contingent capital liabilities denominated in euro where the price declined from 110.5% to 106.5%, despite HSBC announcing very strong results During the month, this gave us the opportunity to take advantage of wider spreads to increase our holdings in contingent capital liabilities of Banco Santander, Lloyds Bank, HSBC and UBS with dates to the refix of between 4 and 5 years.

We added to holdings in Italian insurance companies Intesa San Paulo Vita and Unipolsai, which provide yields of between 3.35% and 4.25% to the call dates in 2024. We also added to 6.5% Rabobank undated security which provides a yield of 5.30%.

We remain aware that as rates go up this may affect some of our securities in the short term but we believe that running yields of well over 5% as for Rabobank provide a good level of protection. Moreover, many of our other bonds have relatively short periods to the call options where the interest is refixed.

In addition, our holdings include both fixed rate bonds and discounted floating rate securities which benefit from rising interest rates, as well as a number of high coupon securities with relatively short call dates.

We will continue to use months such as February to take advantage of lower prices to lock into attractive yields going forward.

GAM Star Credit Opportunities (GBP)

The month of February saw a contrast between strong earnings from issuers held in the portfolio and negative price movements in many of our holdings driven not by fundamentals but instead by some “risk off” price adjustments prompted by equity markets experiencing a strong correction accentuated by a spike in volatility .

During the month a wide variety of investments were made, taking advantage of wider spreads. Contingent capital securities were bought of HSBC and Lloyds Bank where the outstanding period to the next interest refix provides a yield over 5% with a relatively short duration.

The fundamental results of our companies continue to show progress in the multi-year process of capital strengthening. This reinforces their value within the context of historically wide interest spreads. We expect that the income offered by our portfolio with its blend of fixed-rate, fixed to floating bonds will continue to provide an attractive return as well as the potential for selective capital gains and we will continue to use months such as February to take advantage of lower prices to lock into attractive yields going forward.

GAM Star Credit Opportunities (USD)

The month of February saw a contrast between strong earnings from issuers held in the portfolio and negative price movements in many of our holdings driven not by fundamentals but instead by some “risk off” price adjustments prompted by equity markets experiencing a strong correction accentuated by a spike in volatility 

For this reason, the fund declined in value. Despite this, small gains continued to be made in some of the floating rate notes but the majority of fixed rate bonds including fixed to floater securities declined in price. During the month, there were both purchases and sales of securities. Investments were increased in older fixed rate and floating rate bonds of Standard Chartered Bank and HSBC whereas sales were made of some of the older Lloyds Bank bonds where the yield to call price had declined over the last months. As 10 year US Treasury Bond rates have increased towards 3%, we can look forward to new issues coming with wider interest spreads and we would expect coupons and yields of above 5%.

While there were few new issues in the primary market during February, there remain plenty of opportunities in the secondary market. We remain conscious of the prospect of rising interest rates and continue to invest in a balance of fixed rate, fixed to floating rate notes and discounted floating rate note securities as well as high coupon securities with relatively short call dates.

 


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5 March 2018

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