Monthly Funds Commentaries (May 2017)

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

In May, the fund posted good gains as it not only captured income but benefited from capital gains. There were gains in all of our categories of classic fixed-rate bonds, fixed-to-floater securities and floating-rate notes.

During the month, we invested in a wide range of bond opportunities including additions to holdings in Glencore, Demeter/Swiss Re, QBE and Trafigura, which all give bond yields well above 5%. We also added better quality contingent capital securities of Barclays, Credit Suisse, HSBC, Standard Chartered and UBS. We believe that, despite the junior status of these bonds, the yields are attractive and would highlight that the HSBC securities, which have a call and a reset in 2023 on 2024, yield 5.5% with an investment grade rating.

Our view remains that small changes in regulations are favorable for the best names which are strengthening their capital bases. We continue to believe that ongoing regulatory changes are supportive of our holdings as they force the financial sector to further strengthen their capital bases.

As markets still focus on the possibility of rising interest rates, 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-tofloating 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 a positive return during May, due to both interest and capital gains.

As we have previously highlighted, the coupons for our fixed-rate securities are significantly above those of UK Gilt yields with many of them still earning 5.5% - 6% or more for names such as Aviva, Lloyds and National Westminster, comparing favourably with 10-year government bond yields which declined from 1.08% to 1.04% during the month.

The fund participated in the new issue of litigation finance company, 5% Burford Capital 2026 and also added to 6.375% Coventry Building Society at a little above par.

The fundamental results for our companies continue to show progress in the multi-year process of capital strengthening. This reinforces their value within the context of historically wide interest spreads, up to 4% or more for investment grade companies.

We continue to expect that the high income offered by our portfolio, with its blend of fixed-rate, fixed-to-floating bonds and discounted floating-rate notes continues to provide an attractive return, as well as the potential for capital gains.

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

In May, there were price gains in both fixed-rate and floating-rate notes. The result of the French election was positive for credit markets and the search for higher yields continued.

During the month, additions were made to a large and varied number of securities. Among the banks, we added to our holdings in euro of Barclays, BBVA, HSBC, Royal Bank of Scotland, Banco Santander and Rabobank. We also added to holdings of insurance companies such as Ageas, Aegon, Axa, Groupama, La Mondiale and to the trading company Trafigura. Some of these securities, such as Ageas, Aegon and Axa, are discounted floatingrate notes, which benefit from higher rates and provide a counterbalance to our higher-yielding, fixed-rate securities. Indeed the key attribute to many of our fixed-rate holdings was a yield often above 4.5-5% meaning that prices should not be significantly affected by rises in government bond yields from much lower levels.

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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