Monthly Commentary September

GAM Star Credit Opportunities (USD)

During the third quarter, the fund reported positive results, despite rising interest rates, with the US dollar 10-year rate increasing from 2.86% to 3.04%. From the end of June, prices were mixed but the fund generally posted gains as the fundamental attractiveness of our holdings took precedence.

As a buy-and-hold fund that selects bonds using an active management approach, applying a bottom-up investment process based on credit conviction, what drives our returns over time is the fundamental strength of each individual company and coupon accrual.

On that score, the fund continues to benefit from further re-ratings as the metrics of our high-quality issuers keep on improving, and results announcements over the last months were almost all credit positive. Interest spreads that have widened significantly year-to-date are, in our view, now well above fair value, 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 quarter, we participated in two new contingent capital security issues including 7.75% Barclays, which will be callable in five years and – if not called – will have its coupon reset, based on the outstanding five-year swap rates +4.84%; and 7.5% Credit Suisse, which is callable in five years or has its coupon reset based on the five-year swap rate + 460 bps. Both of these issues provide high returns, give widespread protection in the event of generic interest rate rises, and are now trading above their issue prices. The fundamental results of our companies, both the banks and the insurance companies, 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 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.

GAM Star Credit Opportunities (GBP)

During the quarter, the fund posted a small marginal price decline, despite capturing more than 1.3% income. Brexit worries continue to dominate headlines but worries are being mainly expressed in currency – and to some extent – equity markets, rather than credit markets. As a buy-and-hold fund that selects bonds using an active management approach, applying a bottom-up investment process based on credit conviction, what drives our returns over time is the credit strength of each individual company and coupon accrual.

On that score, the fund continues to benefit from further rerating as the metrics of our high-quality issuers keep on improving, and recent results were almost all credit positive. Interest spreads, which have widened significantly year-to-date, are, in our view, well above fair value, do not reflect the underlying credit quality of the portfolio and can create not only a high income but also capital gains going forward. During the quarter, we took profits on some of our longer-dated bonds and used the proceeds to switch in to fixed-to-floater securities, in order to enhance the fund’s resilience from rising rates. For example, we bought into the new 5.875% contingent capital security of HSBC which has a coupon refix in 2026 at 4.276% over the GBP five-year swap rate.

The fundamental results of our companies, both banks and insurance companies, 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 and the fund is well positioned for an environment of somewhat higher rates, with many fixed-to-floater and floating-rate notes as well as a number of high-coupon securities with short issuer call dates.

 

GAM Star Credit Opportunities (EUR)

While prices were mixed over the quarter, the fund managed to post positive gains. Clearly, rate rises can be expected – following the lead of the US – but, despite relatively good growth in the EU, the ECB has been quite dovish in its forward guidance. We are closely monitoring the details of the Italian budget deficit, despite the fact that the fund is not invested in Italian banks and has very marginal exposure to the country’s political risk.

As a buy-and-hold fund that selects bonds using an active management approach, applying a bottom-up investment process based on credit conviction, what drives our returns over time is the credit strength of each individual company and coupon accrual. On that score, the fund is benefitting from further re-ratings as the metrics of our high-quality issuers keep on improving. Interest spreads, which have widened significantly year-to-date – in our view, to levels well above their fair value – 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.

An example is our holding in Euro of 4.75% HSBC AT1 coupon bonds, which are now priced at 97.6%, giving a yield of 5% to the call date in 2029: this represents a spread of 484 bps for an ‘A’ rated issuer. Another example is the Euro 4.75% Santander, priced at 90%, which now yield more than 6% to maturity, with a spread of more than 630 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 well positioned for an environment of somewhat higher rates by owning many securities that are fixed-to-floater, or already floating rate notes, as well as a number of high-coupon securities with relatively short issuer call dates.

 


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10 october 2018

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