Our Approach
Investment Process
The strategy has an active management mandate, and does not track a benchmark. Investment decisions are made based on credit convictions combined with views on specific markets, industries, countries and issuers.

Investment Universe

Our investment universe is very broad and consists mostly of subordinated debt of financial institutions and the strategy also allocates into corporate and corporate hybrid bonds, some high yields and some emerging markets.

The Fund invests in the subordinated debt of investment grade companies. The managers may also allocate to the corporate and corporate hybrid bonds of high yield and emerging markets-based issuers. Consequently, the investment universe is very broad but has no single, commercial index that accurately describes it.

To give an idea of scale, the subordinated debt portion of the global bond universe is around EUR 1.1 trillion in outstanding debt, comprising circa 750 issuers and around 6,500 issues. The managers make no attempt to cover this extremely deep and diverse universe in its entirety. Instead, they use their non-benchmarked, conviction-driven approach to focus only on areas of the market where they see the most promising opportunities and which they know best.

At present, this has resulted in a strong bias to the structurally improving financials sector. The sector comprises hundreds of banks and non-banks ranging from universal banks, to asset managers, real estate companies, brokers, life insurance and non-life insurance companies. In addition to the diversification these provide through their widely divergent business models and balance sheet characteristics, the sophistication and depth of the sub-ordinated universe means a rich and continuously refreshed opportunity set for the strategy.

 

The fund managers’ primary aim in the first step of the process is to identify companies that are profitable and cash generative with good growth prospects and that issue potentially interesting hybrid capital debt. The team believes that such companies will provide predictable and attractive bond returns, while limiting the risk of default.

Given their deep familiarity with their niche areas of the market, they take a bottom-up approach to research. They start similarly to traditional credit investors who, when analysing a bond issuer, typically ask the question: ‘If a company defaults, what do we get?’ This decidedly downside-focused view naturally pushes traditional credit managers towards holding safer, more senior debt due to its higher recovery rate in event of a default.

Because the Atlanticomnium team invests lower down the capital structure where upside payoffs can be enhanced if the company succeeds, they must go beyond the traditional credit approach by also asking ‘if the company survives, what can we get?’. Answering this requires not only fully understanding the company’s creditworthiness, but also its fundamentals. Therefore, they form views on areas typically associated with equity analysis, such as balance sheet strength, profitability and growth, cashflows, management ethics and end game probabilities, franchise value and business model sustainability.

Once the managers have formed a clear, absolute view on both the downside risks and upside potential of each company – typically closely following around 60 at any given time – they evaluate them against peers and against the current market backdrop. Over their many years’ experience, they have built up strong relationships with companies, banks, brokers, analysts and industry experts. Combining this with a broad set of information sources, the managers continuously monitor capital markets dynamics. They discuss and review their current thinking in weekly meetings, which also cover portfolio activity, research findings and direction of further research.

The team’s research and views on every company are thoroughly documented and added to their research database. This body of proprietary views and information accretes as they follow companies over years and market cycles to enrich their understanding of each one.

For each company that has a suitably robust long-term risk/ return profile, the fund managers embrace the fact that no subordinated bond issue is exactly like any other by conducting intensive bottom-up analysis of the capital structure and the subordinated debt, in particular.
Unlike investment grade credit, where the bulk of analysis is spent analysing the credit risk of the issuer, to understand subordinated debt the fund managers must understand the underlying reasons for issuing it. Broadly speaking, investment grade debt tends to be issued for funding purposes, but subordinated debt tends to be issued for capital purposes. As shown by the diagram below, these structures can be complex, and particularly so for banks, building societies, insurance companies.

For financial institutions, issuing subordinated debt is an attractive way to meet regulatory capital requirements – an area that is of increasing importance in today’s markets. The managers’ detailed knowledge of the sector is a distinct advantage that allows them to understand both the capital structures in terms of margins of safety, asset quality, security and prospectus features, and the drivers behind them.

They have cultivated the expertise in interpreting the myriad of types and variations of clauses that may serve to make the issue more or less attractive.  For example, coupons may be discretionary, deferrable and cumulative, may pay, must pay and may incorporate dividend stoppers/ pushers. The managers  look at these in the context of the regulatory environment, tax environment, ratings methodologies employed, make-whole clauses, etc, carefully considering the risks embedded within each issue.

Although subordinated debt is usually floating rate, the sheer range of types means that they can actively manage interest rate risk across the cycle. The types of instruments available for them to select range from: traditional fixed dated bonds, fixed perpetuals, fixed to floater perpetuals, to floating rate notes, constant maturity swaps, steepeners /flatteners, convertibles and cocos (a variation of the convertible bond structure).

After completing their in-depth analysis, they choose the instruments that they believe represent the best value on an absolute basis, then also consider their value relative to industry other similar issues to ensure they are getting the optimal risk/return trade-off. For sub-investment grade bonds, the team takes an even more cautious approach, not only reviewing the credit risk but also the extent of potential risk, as if selling(writing) a put option on enterprise value.

Typically, by the end of this step, the managers will have isolated the 10-20 strongest issuers, offering around 200 securities for the final buy list with which to construct the portfolio.

Using this set of investable bonds from across the whole credit spectrum, the managers select, size and combine them according to what they believe will best deliver consistently high income and capital appreciation in the current macroeconomic environment. Their aim is to create a portfolio that will withstand significant market turbulence and to minimise exposure to volatile trading situations.

To achieve this, they structure the portfolio around two segments. The central piece of the portfolio, the ‘high conviction segment’, is designed to generate high long term returns while mitigating liquidity, market, interest rate and credit risk.  It comprises approximately 10 bonds, each between 1 – 6% of the portfolio, in which the managers have the highest conviction. They often scale into and out of these positions as appropriate to the strategy, an approach which has added considerable value over multi-year periods.

The potential volatility that comes from these larger positions is smoothed through the ‘stability segment’ of the portfolio. The managers pay particularly close attention to diversifying their exposures in this segment by capital structure, security type, sub-sector and liquidity parameters.  These are aimed at providing a stable source of higher income, capital appreciation and diversification. and the managers closely monitor positions of 2.5% and higher.

As is to be expect from a fundamental, research-intensive approach, the managers have a buy and hold mentality which is evidenced by the low annual portfolio turnover. This long term approach is designed to create a portfolio that will withstand significant market turbulence and minimise exposure to volatile trading situations whilst harvesting the illiquidity premium available from investing in the subordinated debt market segment.

The Team constantly reviews the portfolio, adding issues that complement the existing holdings, based on relative value and on a risk-adjusted basis. The fund managers consider the management of credit risk to be of prime importance. Their rigorous bottom-up approach to choosing companies and issues in which to invest embeds very careful consideration of both the upside potential and downside risk of each credit investment throughout the investment process. Once a position has been taken in the portfolio, the fund managers closely monitor daily changes in:

  • Average credit rating across the fund
  • Individual credit ratings and how they influence investor behaviour
  • Prices of both the bonds and their related stocks
  • Relative positions between similar instruments and ratings
  • Liquidity across the fund and of individual positions

The managers maintain a strong focus on liquidity throughout the investment process, with the majority of holdings within the portfolio typically classified as very liquid or liquid. Liquidity risk is further mitigated by diversification across a large number of positions, and by closely monitoring daily liquidity changes across the fund as a whole and of the individual underlying positions.

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Call us on +44 207 917 24 48 to speak with a member of the team; alternatively you can use the form below to send us an email. For details on how to find us please visit the Contact Us page.

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