GAM Star Credit Opportunities (EUR)

Interest rates continued to rise in March, prompting concern from many fixed income investors. Our securities once again demonstrated their resilience to rising rates. Our exposure to fixed-to-floaters and floaters ensure that the fund has low sensitivity to interest rates. Moreover, subordinated debt, especially subordinated debt issued by the financial sector, tends to benefit from a rising rate environment. Despite the moves, we believe central banks will remain accommodative. On the Covid-19 front, news in Europe has been negative overall with third waves of Covid-19 infections occurring. Some countries have reverted to harsher control measures in response. However, we believe such measures should be temporary and only slightly delay the reopening of the economies, as populations become vaccinated. Therefore, we do not believe this will have any impact on our holding companies. We have come to the end of Q4 earnings, and overall financials have been resilient above expectations. We have seen a gradual path to normalisation, with less provisioning than the previous quarters for expected credit losses. Additionally, capital strength remains a bright spot, with the average common equity tier one (CET1) ratio increasing to 14.2% from 13.4% pre-Covid-19. As an example, HSBC has increased its excess capital to USD 43 billion, up from USD 29 billion pre-Covid-19.We believe financials should be able to remain resilient even in a prolonged Covid-19 scenario, especially as fiscal policy is expected to remain accommodative. Moreover, due to our exposure to fixed-to-floaters and floaters, we believe the fund is well-positioned for a period of rising rates. At the same time, we are capturing spreads of circa 360 bps within the subordinated debt of financials. Unlike in other parts of the bond market where spreads are near historical lows, valuations on subordinated debt of financials remain attractive at 100 bps wider than pre-Covid-19.

GAM Star Credit Opportunities (GBP)

 Interest rates continued to rise in March, prompting concern from many fixed income investors. Our securities once again demonstrated their resilience to rising rates. Our exposure to fixed-to-floaters and floaters ensure that the fund has low sensitivity to interest rates. Moreover, subordinated debt, especially subordinated debt issued by the financial sector, tends to benefit from a rising rate environment. Despite the moves, we believe central banks will remain accommodative. On the Covid-19 front, news in Europe has been negative overall with third waves of Covid-19 infections occurring. Some countries have reverted to harsher control measures in response. However, we believe such measures should be temporary and only slightly delay the reopening of the economies, as populations become vaccinated. Therefore, we do not believe this will have any impact on our holding companies. We have come to the end of Q4 earnings, and overall financials have been resilient above expectations. We have seen a gradual path to normalisation, with less provisioning than the previous quarters for expected credit losses. Additionally, capital strength remains a bright spot, with the average common equity tier one (CET1) ratio increasing to 14.2% from 13.4% pre-Covid-19. As an example, HSBC has increased its excess capital to USD 43 billion, up from USD 29 billion pre-Covid-19.We believe financials should be able to remain resilient even in a prolonged Covid-19 scenario, especially as fiscal policy is expected to remain accommodative. Moreover, due to our exposure to fixed-to-floaters and floaters, we believe the fund is well-positioned for a period of rising rates. At the same time, we are capturing wide spreads within the subordinated debt of financials. Unlike in other parts of the bond market where spreads are near historical lows, valuations on subordinated debt of financials remain attractive and wider than pre-Covid-19 levels.

GAM Star Credit Opportunities (USD)

Interest rates continued to rise in March, prompting concern from many fixed income investors. Our securities once again demonstrated their resilience to rising rates. Our exposure to fixed-to-floaters and floaters ensure that the fund has low sensitivity to interest rates. Moreover, subordinated debt, especially subordinated debt issued by the financial sector, tends to benefit from a rising rate environment. Despite the moves, we believe central banks will remain accommodative. On the Covid-19 front, news in Europe has been negative overall with third waves of Covid-19 infections occurring. Some countries have reverted to harsher control measures in response. However, we believe such measures should be temporary and only slightly delay the reopening of the economies, as populations become vaccinated. Therefore, we do not believe this will have any impact on our holding companies. We have come to the end of Q4 earnings, and overall financials have been resilient above expectations. We have seen a gradual path to normalisation, with less provisioning than the previous quarters for expected credit losses. Additionally, capital strength remains a bright spot, with the average common equity tier one (CET1) ratio increasing to 14.2% from 13.4% pre-Covid-19. As an example, HSBC has increased its excess capital to USD 43 billion, up from USD 29 billion pre-Covid-19.We believe financials should be able to remain resilient even in a prolonged Covid-19 scenario, especially as fiscal policy is expected to remain accommodative. Moreover, due to our exposure to fixed-to-floaters and floaters, we believe the fund is well-positioned for a period of rising rates. At the same time, we are capturing wide spreads within the subordinated debt of financials. Unlike in other parts of the bond market where spreads are near historical lows, valuations on subordinated debt of financials remain attractive and wider than pre-Covid-19 levels.

Spotlight: SFDR and ESG as part of our strategy

Our environmental, social and governance (ESG) journey continues to evolve and the application with the Central Bank of Ireland (CBI) to align the fund with Sustainable Finance Disclosure Regulation (SFDR) Article 8 marks a new milestone. The positioning of the fund under Article 8 follows the integration of ESG into our research and investment process, supplemented with sustainability exclusion criteria. These two pillars are aligned with our approach – investing on a long-term buy and hold basis, based on bottom-up credit convictions. With the full integration of ESG, we maintain our long-term, forward-looking view on the robustness of the issuers we invest in. On the other hand, our sustainability exclusion criteria follow the sector exclusions outlined in our ESG policy for ethical reasons (weapons, tobacco, alcohol, gambling) and adding sectors most vulnerable to climate change (coal, oil sands) and companies with the most serious ESG breaches.

ESG Integration:

The integration of ESG factors in our investment process is based on a full integration approach where ESG factors are incorporated in the team’s credit research process in a manner consistent with our long-established, bottom-up research policy.ESG is fully integrated into the research process. Credit analysts within Atlanticomnium consider ESG factors as part of the research process. ESG is one of the key building blocks of the credit analysis framework and directly influences analysts’ recommendations and subsequent investment decisions.Each research note has a dedicated section around ESG risks which then feeds into the overall assessment of the credit profile of the issuer. External ESG data provider MSCI is leveraged to help identify key ESG trends and topical issues material to the analysis of issuers. This is the starting point of the ESG analysis, where ESG ratings help to provide an indication of risk of issuers from a credit perspective. Analysts then conduct internal research on key areas of focus for specific issuers. For issuers with poor ESG ratings, rating downgrades, controversies and other risks, there will be an increased layer of analysis to assess the implications for the credit profile. Our ESG approach is based on in-depth analysis aimed at better understanding risks of issuers rather than excluding issuers based on their ESG profile.As these in-depth notes are thoroughly discussed by the investment team during investment committee meetings, any potential risks from ESG will be carefully assessed to ensure that the issuer meets the criteria for inclusion in the portfolio. Furthermore, ESG developments are also thoroughly discussed as part of investment committee meetings to ensure that any change in ESG risk that impacts the credit profiles of issuers are taken into account. Therefore, ESG is integrated in our research / investment process throughout the lifecycle of our investments.ESG profiles of issuers are closely monitored as part of the research investment process. This includes a periodic monitoring of changes in MSCI ESG ratings, monitoring of controversies and ESG discussions as part of management interactions.A rounded approach to ESG integration continues post-investment. For this reason, engagement with issuers is also a key priority of our ESG agenda. Interaction with the senior management of our issuers has long been a central part of our investment process and has resulted in deep access and strong relationships. Extending this engagement to cover ESG topics is a natural development.The investment team conducts more than 240 company interactions annually. As part of these regular interactions with management, key ESG issues are discussed and analysts will document the discussions as part of a feedback report to the investment team. On specific ESG issues (engagement) Atlanticomnium will follow up on the progress made by the management.

Overview of ESG in our investment process

Sustainability exclusion criteria

  • Any involvement in controversial weapons as outlined in the GAM-wide exclusion policy on banned weapons.
  • Derive over 10% of their annual revenue from the manufacturing of weapons or weapon components. 
  • Derive over 5% of their annual revenue from the manufacture, retail or distribution of tobacco or tobacco-related products.
  • Derive over 25% of their annual revenue from the mining of thermal coal or from generating electricity from thermal coal, unless the issuer has made a credible net-zero decarbonisation commitment. 
  • Derive over 25% of their annual revenue from the extraction of oil sands. 
  • Are assessed as having serious breaches of the UN Global Compact, the ten principles of which cover human rights, labour rights, the environment and anti-corruption.

Beyond the sectors excluded, including weapons, tobacco, thermal coal and oil sands – issuers with serious breaches of the UN Global Compact are also excluded. The UN Global Compact regroups ten principles, including human rights, labour rights, the environment and corruption. We believe that issuers in serious breach of these principles carry higher credit risk (litigation, franchise erosion, etc), making risk-return unattractive for bondholders.

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