Monthly Commentary June

GAM Star Credit Opportunities (USD)

The fundamental results of our holdings were positive from a credit risk perspective, yet credit spreads continued to widen. This has created good opportunities for long-term investors as spreads have widened significantly above fair value and do not reflect the strong underlying credit quality of the issuers held in the portfolio.

We repeat the example of HSBC Contingent Capital Securities which now yield between 6.5% and 7.0% to call within 5 to 10 years. These represent, in our view, excellent value relative to 10-year US Treasury yields which remain below 3%. The fundamental results of our companies, both the banks and insurance firms, generally continue to show good progress during a 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 50% of the portfolio is in fixed-to-float bonds. These fixed coupon paying bonds will move to a floating rate according to a date written in the prospectus. We also hold 15% in discounted floating rate notes as well as a number of high coupon securities that have relatively short issuer call dates so are less exposed to interest rate risk.

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

GAM Star Credit Opportunities (GBP)

In June the fund price declined although there were no specific credit events. The risk-off sentiment that emerged in May continued, and the majority of holdings fell in price, generally for no specific company reason. The fundamental results of our holdings were credit positive, yet credit spreads continued to widen. This has created good opportunities for long-term investors as spreads have widened significantly above fair value and do not reflect the strong underlying credit quality of the issuers held in the portfolio.

As an example Lloyds 7 5/8 with a call in 2023 is yielding just under 5.5%, a spread of over 440 basis points (bps) over its equivalent gilt yield. In our view, this represents excellent value. The fundamental results of our companies, both the banks and insurance firms, generally continue to show good progress during 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 are still a wide number of securities where it is possible to lock into attractive yields going forward.

GAM Star Credit Opportunities (EUR)

In June the fund price declined although there were no specific credit events. The risk-off sentiment that emerged in May continued, and the majority of holdings fell in price, generally for no specific company reason. The fundamental results of our holdings were credit positive, yet credit spreads continued to widen. This has created good opportunities for long-term investors as spreads have widened significantly above fair value and do not reflect the strong underlying credit quality of the issuers held in the portfolio.

We repeat the example of 5.25% HSBC and 4.75% Santander contingent capital securities, which now yield respectively 4.0% and 6.3% to calls within 4 to 7 years, and represent a spread of about 440 basis points (bps) for the first and about 638 bps for the last. In our view, this represents excellent value, relative to their respective euro government bond yields.

The fundamental results of our companies, both the banks and insurance firms, generally continue to show good progress during 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-floater bonds. We also hold almost 15% in discounted floating rate notes, 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.


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11 July 2018

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