Monthly Funds Commentaries (July 2017)

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

During July the fund posted steady positive results as income was supplemented by capital gains. There were price gains in all of our categories of fixed-rate bonds, fixed-to-floater securities and floating rate notes.

Investments were made in a wide variety of bond opportunities including the new issue in the US dollars of 5.375% Phoenix 2027, the UK Insurance company, 6.625% Leucadia 2047, contingent capital securities of Credit Suisse, HSBC, UBS and old discounted floating rate notes priced around 78% of Den Norske Credit Bank and Nordea Bank.

The fundamental results of 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.

As we believe there is the probability of gradual interest rate rises, we selectively buy floating rate notes at discounted prices. Meanwhile many of our undated 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, 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 continued to post steady positive gains from income and capital in July while there was little change in the 10-year gilt yield.

As we have highlighted in previous reports the coupons on our undated fixed rate securities are well above those of UK gilt yields with many of them still earning 5.5% to 6% for names such as Aviva, Lloyds and National Westminster. Thus they will be less affected by rises in government bond yields.

Nevertheless during July we have reduced some of our holdings in long dated securities of Aviva, Axa, Prudential where prices had increased to levels where yields were below 5%. We replaced them with contingent capital securities of Coventry Building Society and HSBC where the time to the interest rate refix is much less and the yields are similar or higher.

The fundamental results of our companies, both the banks and the insurance companies, continue to show progress in the multiyear 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 rate notes will provide an attractive return as well as the potential for capital gains.

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

Despite the yield on the 10 year German bund increasing from 0.47% to 0.54% in July, the fund posted steady positive returns with gains in both fixed rate and floating rate securities.

The largest gainers included a mix between fixed to floating 6.375% Groupama, the French insurance company where the debt was rated investment grade, fixed to floater contingent capital securities of BBVA as well as Axa and Aegon floating rate notes based on 10 year Swaps.

During the month purchases were made in a wide range of securities in Euro ranging from old callable 5.5% Royal Bank of Scotland securities, 4.75% contingent capital securities of HSBC to floating rate notes of ING based on 10 year swaps rates priced at 86%. To further mitigate the interest rate risk, we have increased our holdings in floating rate notes and would highlight the Ageas floating rate notes which pay 3 month Euribor + 135bp which we have been buying around 60%.

Prices have risen as the majority of European banks continue to become stronger and we can highlight the price increases in our holdings in BBVA and Santander contingent capital securities following the resolution of Banco Popular.

We continue to watch out for rises in government bond rates 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 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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