Monthly Funds Commentaries (April 2017)

GAM Star Credit Opportunities (USD), GAM US Dollar Special Bond Inc.

The fund posted steady positive results in April as it not only captured income but also benefitted from capital gains. There were gains in classic fixed rate bonds, fixed to floater securities, contingent capital securities and floating rate notes. Among the bonds that we increased our holdings were some relatively new issues, including 5.25% Legal and General 2047 and 5% EFG 2027 at prices marginally above 100%.

However we also added to our holdings in a number of better quality and higher yielding contingent capital securities of BNP, Credit Suisse, HSBC and UBS. Our view remains that small changes in regulations are favorable for the best names which are strengthening their capital bases, as we saw from recent results. HSBC for example has increased its Core Equity Tier1 capital ratio from 11.9% in 2015 to 14.3% in its latest results.

In non-financial names, we participated in the new issue of 7.25% Petra Diamonds 2022 and added to holdings in Glencore and Trafigura.

As markets still focus on the possibility of rising interest rates, we continue to selectively buy floating-rate notes at discounted prices. Meanwhile, many of our undated fixed rate securities, including the contingent capital securities, have a call date within 5 to 10 years upon which interest is reset at a wide spread over prevailing interest rates if the bonds are not called.

So our blend of fixed rate, fixed-to-floating securities and deeply discounted floating-rate notes continues to provide an attractive return as well as the potential for capital gains.

GAM Star Credit Opportunities (GBP), GAM Sterling Special Bond Inc.

The fund posted steady positive returns during April.

As we have previously highlighted, the coupons for our fixed-rate securities are significantly above these of UK Gilt yields with many of them giving 5.5%, 6% or more for names such as Aviva, Lloyds and National Westminster, comparing favourably with ten-year UK government bond yields which declined this month from 1.14% to 1.08%. We also increased our holdings of senior Tesco 2042 bonds with a yield above 5%.

The fundamental results of our holdings, particularly the banks, continue to show progress in the multi-year process of capital strengthening as it has been shown by recent results of HSBC which has increased its Core equity tier 1 capital ratio from 11.9% in 2015 to 14.3% in its latest results.

This reinforces their value within the context of historically wide interest spreads, up to 4% or more for investment grade securities.

We continue to expect that the high yields offered by our portfolio with its blend of fixed-rate, fixed-to-floating bonds and discounted floating-rate notes will remain attractive to investors when it is difficult to obtain significant returns elsewhere.

 

GAM Star Credit Opportunities (EUR), GAM Euro Special Bond Inc.

In April, despite concerns about the French election, the fund posted steady positive returns and recorded some capital gains.

There were price increases in both fixed-rate and floating-rate note securities. There were also gains in the contingent capital securities. During the month, additions were made to a number of the contingent capital securities including 6.5% Barclays, 6.25% BNP, 6.75% Banco Bilbao Vizcaya, 6.25% Banco Santander, 6.5% Credit Agricole, 5.25% HSBC and 6.75% Société Générale. All of these securities increased in price over the month.

The fundamental results of our holdings, particularly the banks, continue to show progress in the multi-year process of capital strengthening. HSBC, for example has increased its Core equity tier 1 capital ratio from 11.9% in 2015 to 14.3% in its latest results.

We also increased our holdings in 6.5% Stichting Rabobank and 6.375% Groupama, where prices also increased. The key attribute in the purchases of fixed-rate securities was a coupon generally above 5%, meaning that prices should not be materially affected by rises in government bond yields from much lower levels.

Among floating-rate securities based on 10 year swap rates, we increased our holdings in Aegon and Axa at prices of 68% and 71.5%.

We remain cautious and selective with respect to fixed-rate securities but we believe our blend of fixed-rate, fixed-to-floating securities and deeply discounted floating-rate notes provides an attractive return as well as the prospect for selective capital gains.

 

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