The sell-off of bank debt on the back of Bill Gross’s departure from Pimco has been named as a key reason for the Tideway Global Navigator fund’s negative September performance.
The group said contingent capital bonds, known as cocos (and which are becoming a more common form of debt issued by banks), strongly sold off at the end of September when Mr Gross announced his shock resignation from the firm he co-founded.
Peter Doherty, manager of the fund, said in an update to clients the market in these bonds saw dramatic moves around the time of the announcement.
“The negative performance of the Global Navigator fund in September stemmed principally from an end-of-month credit market sell-off specifically in bank capital (Cocos),” he said.
“The move of as much as -2 per cent in one day on some bonds was a reflection of the Pimco portfolio liquidation fears following the abrupt resignation of Bill Gross.”
Cocos, or contingent convertibles, are similar to convertible bonds in that they can both be converted into equities.
However, Cocos are different in that the company that issues them does not need to count the shares as part of its diluted earnings. By not being considered, the company’s earnings per share looks stronger.
Mr Doherty said the management had been focused on lowering the fund’s overall risk position.
“While selling some bonds into a weak market cost up to 0.5 per cent, this approach has the benefit of avoiding subsequent further losses in the event the market worsens,” he said.
“As we move into October the fund is recovering nicely and the drawdown from peak net asset value is back to less than 2.5 per cent.”
Mr Doherty added the “muted response” of markets – including those that specifically measure volatility – to the geopolitical tension globally and economic risks “is something to both behold and be wary of”.
“It is a good time to keep risk close to home and be patient,” he said. “Better opportunities will come soon enough.”
As at the end of September the fund held 33.8 per cent in cash, showing the manager’s bearishness.
The fund invests mainly in fixed income credit, equity indices and interest rate futures, and aims to deliver returns ahead of inflation after fees through all market conditions
“When there is a need to head to cash, we will do so,” Mr Doherty said.
