Monthly Funds Commentaries (Jan.17)

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

There was a marginal increase in the yield of the 10-year US Treasury bond in January to 2.44%, but the fund was nevertheless able to post a solid positive return over the month. There were in particular gains in the floating rate notes but also smaller gains in some of the higher-yielding fixed-rate securities.

During the month we took advantage of several new issues, including 7.125% Credit Suisse, 5.875% La Mondiale 2047, and 5.125% Axa 2047, and we also increased holdings of Glencore, HSBC, Rabobank and Swiss Re in the secondary market.

Our view remains that US rates have further to rise but that a large part of the increase has taken place, while our securities are yielding 5–6%, and sometimes even more.

As Donald Trump becomes President the increase in fundamental growth prospects has already led to higher government bond yields. However, around the world the prospect of such higher rates is more limited and the stronger US dollar acts as a brake against more substantial increases in long-term bond yields in the short term. As such, our blend of high-quality 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.

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

Ten-year UK government bond yields increased from 1.24% to 1.42% in January, and yet the fund managed to post a solid positive return. As we had previously highlighted, we have been protected from rising rates by the very wide interest spreads, with coupons well above 6% on Aviva, British Insurance and Lloyds Bank.

During the month, we continued to make selective purchases: we increased our holding in euro-denominated HSBC contingent convertible notes, which have an interest rate reset in 2023 at a yield in euro terms of 5%. Hedged back to sterling this results in a yield to call of over 6%.

We participated in the new investment grade rated issue of 5.25% TP ICAP 2024, and we took an initial holding in 6.75% Standard Life undated securities with a yield above 5% to the call date in 2027, in addition to many smaller purchases of a wide variety of securities.

Fundamental results for our financial 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, up to 4% or more for investment grade financial 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 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.

Despite the rise in long-term interest rates, with German 10-year yields increasing from 0.2% to 0.4% in January, the fund managed to post a solid positive return.

In particular, there were significant gains in our deeply discounted floating rate notes, but there were also gains in the fixed-rate securities, including in particular our holdings of contingent capital fixed-to-floating securities and selective other fixed-rate bonds, which benefited from credit strengthening.

During the month purchases were made in a wide range of securities, ranging from Ageas and Axa discounted floating rate notes, 6.5% Rabobank undated securities where an additional EUR 1.5 billion offering kept prices subdued at 111%, and 5.125% euro-denominated Tesco 2047 bonds at 101%. Additions were also made to contingent capital fixed-to-floating securities of HSBC, BNP and Société Générale.

The key ingredient in the purchase of fixed-rate securities was a coupon above 5%, which meant that in many cases the rises in government bond yields had no effect on their prices, which often increased in value. 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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