Monthly Funds Commentaries (August 2017)

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

Prices were mixed during August but the fund posted positive returns mainly due to the income received. There were price rises in many of the floating rate notes while some of the fixed rate bonds had marginal price declines. During the month purchases were made of both financial and non-financial companies.

We added to our holdings of 6.15% Tesco 2037 at around 105% as well as increasing holdings in 6% HSBC contingent capital securities around 105.5%. Other investments were also made in smaller size in a wide variety of other financial and non-financial companies. The fundamental results of our companies, both the banks and insurance companies, continue to show progress in the multi-year process of capital strengthening. This reinforces their value in the context of historically wide interest spreads.

As we believe there is the probability of interest rate rises, we selectively continue to buy floating rate notes at discounted prices as well as higher coupon bonds with short dated calls. Meanwhile many of our fixed-rate securities including contingent capital securities, have a call date within 5 to 10 years upon which interest is reset at a wide spread over prevailing rates if the bonds are not called.

So our blend of fixed-rate bonds, fixed to 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 continued to post positive gains from income and capital gains in August.

Ten-year gilt yields declined to 1.03% during the month but the coupons on our undated fixed rate securities are well above these levels with many of them still earning between 5.5% to 6% for names such as Aviva, Lloyds and National Westminster. Thus, they will be less affected if government bond yields rise.

Nevertheless, we have continued to replace some of our long-dated insurance bonds with contingent capital securities of Barclays, Coventry and HSBC where the outstanding period to the interest refix provides a yield above 5% and the duration is much shorter. For example, the Coventry Building Society 6.375% contingent capital securities which yield 5% are either repaid in 2019 or are refixed for 5 years at 4.113% over prevailing interest rate swap yields.

The fundamental results for our companies, both the banks and the insurance companies, continue to show progress in the multi-year process of capital strengthening. This reinforces their value in the context of historically wide interest spreads. We continue to monitor the possibility of rising generic interest rates. However, we also expect that the income offered by our portfolio with its blend of fixed-rate, fixed-to-floating bonds and discounted floating-rates notes will provide an attractive return as well as the potential for capital gains. 

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

While the fund gained in price during August, prices were mixed both amongst fixed rate and floating rate bonds.

During the month a wide variety of securities were purchased including 4.75% HSBC contingent capital liabilities at around 103% which provide a good return for investment grade rated securities. We also added to holdings of old callable 5.25% and 5.5% Royal Bank of Scotland securities with a positive yield to the upcoming call in December, but the possibility of a significant uplift in return if they are not called.

Among floating rate notes we have bought old ING securities which pay 50 basis points above 10-year swap rate below 89%. We also added to our holdings in Rabobank which still provide a yield above 5%. We continue to watch out for rises in government bond yields but the key attribute of many of our fixed-rate holdings is a yield generally above 4%, meaning that prices should not be significantly affected by rises in government bond yields from much lower levels.

We continue to believe that our blend of fixed-rate bonds, 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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