During October, spreads of the securities held within our portfolio were slightly wider. Concerns linked to tapering and less transitory inflation sparked interest rate volatility causing credit markets to underperform. This was the same for subordinated debt, despite the fact the asset class has low sensitivity to interest rates, as demonstrated by the performance year-to-date. Moreover, we are currently capturing spreads above 300 bps for subordinated debt of financials, which is significantly wider than pre-Covid. Going back further, prior to 2008, spreads of subordinated debt of financials were below 100 bps. These wide spreads still exist despite the fact that financials demonstrated their strong health during the pandemic and have significantly increased their capital over time. As such, we believe the securities held within our portfolio should perform strongly irrespective of the moves in interest rates. We have seen this happen during previous periods of tapering and rising interest rates. 

We are in the middle of Q3 earnings season and, as of the end of October, results of financials have once again been strong. This is due to the continuation of robust pre-provision income, as well as lower provisions and in several cases provision releases (ie reversing provisions for expected credit losses from prior results which did not materialise). As an example, NatWest released GBP 242 million of provisions made last year and its common equity tier one (CET1) ratio went up by 50 bps to 18.7%, which is more than twice the capital required. 

In conclusion, we believe our strategy is well positioned for the current environment. As we have demonstrated in past periods and this year, our strategy has very low sensitivity to interest rates. In addition, we are still generating high income, with good visibility due to the strong credit quality of financials. Finally, valuations remain attractive, and as such, we should benefit from that going forward.

  • The Valuation date: July 11, 2024
    120,240,709GAM Sustainable Climate Bond fundIE000BSJBO140.00470.0184-0.05320.471.84-5.32
    220,240,709GAM Star Crdt Ops EUR InvIE00B50JD3540.00740.06910.59310.746.9159.31
    320,240,709GAM Star Crdt Ops GBP InvIE00B510J1730.00730.06060.87140.736.0687.14
    420,240,709GAM Star Crdt Ops USD InvIE00B57693100.00710.05950.78640.715.9578.64
    520,240,709GAM Interest Trend IncIE00BYM4P9130.00780.05960.33560.785.9633.56
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