Monthly Commentary September

GAM Star Credit Opportunities (USD)

Markets had a more constructive tone in September, following the cuts in interest rates by both the ECB and the Federal Reserve. The ECB also announced the reopening of asset purchases, which despite being lower than expected at EUR 20 billion a month, are without any time limit which can be seen as a positive. Finally, the ECB has announced a new round of TLTRO at very favorable terms and deposit tiering where part of banks’ excess liquidity reserves will be exempt from negative rates. This will alleviate some pressure around banks earnings and in tandem with further dovish monetary policy to boost the economy this is a strong positive for financials and hence our fund. Subordinated debt of financials finished the month at spreads which were slightly tighter than at the beginning. Therefore, the fund benefited slightly from price appreciation, on top of the income we received. Within this low interest rate environment, we feel we are very well positioned as we are capturing spreads well above 350 bps within our fund. Moreover, the lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Within the legacy space, we saw a positive development, which was that Santander called one of their floating rate notes at par at the end of the month. The bond was trading at 67%, prior to the call at par. This had a positive impact on other legacy bonds that we own. However, we feel that there is significantly more upside. Instruments which have been issued under Basel II and Solvency 1 do not comply with the new regulatory framework (so-called legacy/grandfathered bonds). Over time, these bonds are becoming inefficient. Therefore, there is a lot of optionality in terms of having issuers tendering or calling these bonds over the coming quarters/years at a significant premium to current prices, as has been demonstrated by Santander.

We also saw strong demand for new issues. For example, Nationwide, rated A by S&P, came with a new AT1 coco. Demand on primary market exceeded the issuance size of GBP 600m by 6.6x and the bond is already trading two points higher. The transaction was priced at very attractive levels and if not called in 6 years, coupon resets based on 6 years gilts + 5.39%. It currently yields close to 5.5% so 4x more than senior unsecured of Nationwide with a maturity of 2026. In other words, a spread pick up of 400bps, for the same credit risk and less interest rate risk.  

The fund is well positioned to capture high and predictable income, in our view, and given the attractive valuation levels; we feel the fund has scope to benefit from further capital gains.

GAM Star Credit Opportunities (GBP)

Markets had a more constructive tone in September, following the cuts in interest rates by both the ECB and the Federal Reserve. The ECB also announced the reopening of asset purchases, which despite being lower than expected at EUR 20 billion a month, are without any time limit which can be seen as a positive. Finally, the ECB has announced a new round of TLTRO at very favorable terms and deposit tiering where part of banks’ excess liquidity reserves will be exempt from negative rates. This will alleviate some pressure around banks earnings and in tandem with further dovish monetary policy to boost the economy this is a strong positive for financials and hence our fund. Subordinated debt of financials finished the month at spreads which were slightly tighter than at the beginning. Therefore, the fund benefited slightly from price appreciation, on top of the income we received. Within this low interest rate environment, we feel we are very well positioned as we are capturing spreads well above 500 bps within our fund. Moreover, the lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Within the legacy space, we saw a positive development, which was that Santander called one of their floating rate notes at par at the end of the month. The bond was trading at 67%, prior to the call at par. This had a positive impact on other legacy bonds that we own. However, we feel that there is significantly more upside. Instruments which have been issued under Basel II and Solvency 1 do not comply with the new regulatory framework (so-called legacy/grandfathered bonds). Over time, these bonds are becoming inefficient. Therefore, there is a lot of optionality in terms of having issuers tendering or calling these bonds over the coming quarters/years at a significant premium to current prices, as has been demonstrated by Santander.

We also saw strong demand for new issues. For example, Nationwide, rated A by S&P, came with a new AT1 coco. Demand on primary market exceeded the issuance size of GBP 600m by 6.6x and the bond is already trading two points higher. The transaction was priced at very attractive levels and if not called in 6 years, coupon resets based on 6 years gilts + 5.39%. It currently yields close to 5.5% so 4x more than senior unsecured of Nationwide with a maturity of 2026. In other words, a spread pick up of 400bps, for the same credit risk and less interest rate risk.  

The fund is well positioned to capture high and predictable income, in our view, and given the attractive valuation levels; we feel the fund has scope to benefit from further capital gains.

GAM Star Credit Opportunities (EUR)

Markets had a more constructive tone in September, following the cuts in interest rates by both the ECB and the Federal Reserve. The ECB also announced the reopening of asset purchases, which despite being lower than expected at EUR 20 billion a month, are without any time limit which can be seen as a positive. Finally, the ECB has announced a new round of TLTRO at very favorable terms and deposit tiering where part of banks’ excess liquidity reserves will be exempt from negative rates. This will alleviate some pressure around banks earnings and in tandem with further dovish monetary policy to boost the economy this is a strong positive for financials and hence our fund. Subordinated debt of financials finished the month at spreads which were slightly tighter than at the beginning. Therefore, the fund benefited slightly from price appreciation, on top of the income we received. Within this low interest rate environment, we feel we are very well positioned as we are capturing spreads well above 400 bps within our fund. Moreover, the lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Within the legacy space, we saw a positive development, which was that Santander called one of their floating rate notes at par at the end of the month. The bond was trading at 67%, prior to the call at par. This had a positive impact on other legacy bonds that we own. However, we feel that there is significantly more upside. Instruments which have been issued under Basel II and Solvency 1 do not comply with the new regulatory framework (so-called legacy/grandfathered bonds). Over time, these bonds are becoming inefficient. Therefore, there is a lot of optionality in terms of having issuers tendering or calling these bonds over the coming quarters/years at a significant premium to current prices, as has been demonstrated by Santander.

We also saw strong demand for new issues. For example, Nationwide, rated A by S&P, came with a new AT1 coco. Demand on primary market exceeded the issuance size of GBP 600m by 6.6x and the bond is already trading two points higher. The transaction was priced at very attractive levels and if not called in 6 years, coupon resets based on 6 years gilts + 5.39%. It currently yields close to 5.5% so 4x more than senior unsecured of Nationwide with a maturity of 2026. In other words, a spread pick up of 400bps, for the same credit risk and less interest rate risk.  

The fund is well positioned to capture high and predictable income, in our view, and given the attractive valuation levels; we feel the fund has scope to benefit from further capital gains.

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