Quarterly Q2 Commentary

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

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

Investments were made in a wide variety of bond opportunities including, earlier in the quarter, the new issue in US dollar of 5.375% Phoenix 2027, 6.625% Leucadia 2047, contingent capital securities of Credit Suisse, HSBC, UBS and old discounted floating rate notes of Den Norske Creditbank and Nordea Bank. Later in the quarter we added to our holdings of 6.15% Tesco 2037 at around 105% and BNP-Fortis Euro denominated securities at 84% paying 200 basis points above 3 month Euribor which we hedged back to US dollars.

The fundamental results of 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. As we believe there is the probability of eventual 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 five to ten 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 and 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 steady positive results over the quarter despite a marginal increase in the 10-year Gilt yield from 1.26% to 1.36%.

As we have highlighted in our previous reports, the coupons on our fixed-rate securities are significantly above those of UK Gilt yields with many of them still earning between 5% and 6% for names such as Aviva, Lloyds and National Westminster. Thus, they will be less affected by rises in government bond yields.

Nevertheless, during the quarter, we have continued to replace some of our long-dated insurance bonds with contingent capital securities of Barclays, Coventry, HSBC and Lloyds Bank where the outstanding period to 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 five years at 4.113% over prevailing interest 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 yields. 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.

The fund posted steady positive gains during the quarter as there were price gains amongst both fixed rate and floating rate bonds.

During the quarter, a wide variety of holdings were bought in Euro including old callable 5.5% Royal Bank of Scotland securities, 4.75% contingent capital securities of HSBC and ING floating rate notes based on 10-year swap rates in the mid 80% range.

To further mitigate interest rate risk we have increased our holdings in discounted floating rate notes and would highlight both the Ageas and the BNP Fortis floating rate notes which pay respectively three month Euribor +135 bp and three month Euribor +200 bp and are priced at 60% and 85%.

Prices have risen as the majority of European banks continue to become stronger and we can highlight 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 for 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 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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