Monthly Funds Commentaries (Feb.17)

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

There was a marginal decrease in the yield of the 10 year US treasury bond in February from 2.45% to 2.39% and the fund posted steady positive gains. Some of the largest price improvements were in our holdings of floating rate notes where the spectre of corporate buy backs in addition to rising interest rate remains attractive. However, there were also many smaller gains in our fixed rate securities which continue to provide yields above 5%.

During the month, we continued to add to holdings such as 5.125% AXA 2047, 6.5% Prudential , 5.625% Demeter Swiss Re 2052 and 5.5% Pershing Square 2022. We also added to holdings in AT1 cocos including 6.25% HSBC, 7.375% BNP, 7.75% Credit Agricole, 7.125% Credit Suisse and 6.875% UBS. Due to ongoing regulatory pressure that has led to ongoing capital build-up combined with active de-risking by European banks, we believe that these securities selectively provide worthwhile returns.

Our view remains that interest rates have further to rise but a large part of the increase has already taken place. Within this context our fixed rate securities yielding 5-6% and sometimes more, remain good investments. In addition, there is the benefit of a number of discounted floating rate notes, where interest refixes are being set higher. Our blend of high quality fixed-rate, fixed-to-floating securities and deeply discounted floating rate notes continues to provide an attractive return as well as selective capital gains.

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

Ten-year UK government bond yields declined from 1.42% to 1.15% in February, and the fund posted a solid positive return. However, as we have previously highlighted, the coupons of our securities are significantly above UK Gilt yields, with many of them giving 5.5%, 6% or more for names such as Aviva, Legal and General, Lloyds and Prudential.

During the month, we added to our holdings in a wide variety of credits mainly by increasing existing positions. The fundamental results of our holdings, particularly the banks, continue to show progress in the multi-year process of capital strengthening. This reinforces their value in the context of historically wide interest spreads, up to 4% for investment grade issuers.

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

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

During February, the majority of holdings showed increases in value with the greatest gains arising among deeply discounted floating rates notes. Purchases were made in a wide range of securities ranging from Euro denominated 5.625% Tesco 2047 to 6% and 6.375% Groupama bonds. We also increased our largest holding of 6.5% Rabobank undated securities where the additional placing of euro 1.5 billion kept prices subdued at around 111% -112%. Additions were made to contingent capital fixed-to-floating securities of 6.5% Barclays, 6.25% HSBC, 6.25% BNP and 6.75% Société Génerale. The key ingredient in the purchase of fixed rate securities was a coupon generally above 5%. The prices of such issues are, in many cases, not materially affected by rises in government bond yields from a much lower level.

Over the month, some of the largest prices gains witnessed related to discounted floating rate notes, which remain relatively subdued within the context of current interest rates, but can be subject to buybacks at a premium by the issuers.

We will remain cautious and selective with respect to new purchases of fixed-rate securities and we believe that 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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