Fixed IncomeMay 5 2015

Fund Review: Gam Star Credit Opportunities fund

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This fixed income fund is managed by Atlanticomnium’s Anthony Smouha, who has roughly 30 years of bond investing behind him, on behalf of GAM.

“The fund aims to seek a steady high income from bonds that are predominantly investment-grade companies, and will include all types of bonds,” he explains. It is about investing in areas of the bond market where he feels he can “extract great value”.

The manager describes himself as a value investor when it comes to analysing holdings for the portfolio. He says: “I emphasise cash bonds because we don’t do any derivative bond products. It’s normal cash bonds as if we were running a good equity-type fund but in the bond arena, picking where we see value and cashing in the nice yields we get from the securities we have. This adds to another characteristic of the process of investment and that is we generally do not like to make bets on where short-term interest rates are going.”

One of the themes that both Mr Smouha and his brother, Jeremy Smouha, who is chief executive of Atlanticomnium, have picked up on is the requirement since the global financial crisis of 2008 for banks to hold more capital. Jeremy Smouha says: “All the central banks and politicians don’t want another financial crisis, so you have a top-down theme of getting all these companies to be safer and sounder. That is good for credit. If you have a bank pursuing a safer and sounder policy then the likelihood of default is much less and so you’re more comfortable as a bondholder.”

The fund’s ability to invest in junior and hybrid debt ensures there is duration protection. Aberdeen Asset Management – one of the larger holdings in the fund – has a good franchise, does not require a large balance sheet and has issued some junior debt, Anthony Smouha says.

Jeremy Smouha notes: “We don’t want to be particularly interest rate sensitive and we’ve done this by having about 50 per cent of the portfolio in fixed-rate bonds, which do well when rates go down, and around 50 per cent in bonds that are floating-rate note or fixed-to-floater, which do well when interest rates go up. So it will be much less volatile than the bond index because of this. In fact, when interest rates have gone up we’ve managed to go up rather than down as we did in January, so it’s been a very steady performer.”

Anthony Smouha adds: “This junior debt/hybrid debt asset class has instruments in it that are quite good in terms of duration protection because a fixed-to-floater bond will have a coupon that is six for five years, and then in five years’ time it will either be called or it will be refixed in five years based on the five-year rate at that time, reducing the interest rate risk.”

The fund sits at level four on a risk-reward spectrum and the US dollar accumulation share class has ongoing charges of 1.56 per cent.

The portfolio has generated top-quartile returns in the Investment Association Global Bonds sector across one and three years, data from FE Analytics shows. In the three years to April 24 2015, it delivered 54.5 per cent to investors against the sector average of 10.02 per cent. While in the past 12 months to April 24, the fund returned 18.52 per cent compared with the average 4.63 per cent by the sector.

Anthony Smouha says: “In the past month, the floating-rate notes have slightly detracted from performance because the rates were lower for longer. They not only provide a buffer of protection against our fixed-rate holdings, but they are deeply discounted. The other thing about these bonds is that in the new world of capital restructuring and capital raisings from companies, there has been what is called capital liability management. You could always be subject to the fact that a company will come in and try to exchange or buy back that debt in order to capture the discount.” He insists it is “not just a financial fund” and that he takes a “broad view”.

Turning to his outlook for bonds, the manager predicts: “Our base case is that Greece will stay in the eurozone, but we think there could be volatility if it leaves. Volatility creates opportunities because we have many different instruments; some that are going to be repaid in the short term, some in the long term. If there is turbulence in the market, we will be there to take advantage.”

EXPERT VIEW

Rob Morgan, pensions and investment analyst, Charles Stanley Direct

Another highly flexible fund, this time with a near four-year track record. This is clearly a short time frame, but it is still worth noting some impressive performance and admirably low volatility in the period. It is run by Anthony Smouha, of Atlanticomnium in Geneva, and is a small, nimble mandate. The fund is first in its sector across three years powered by exposure to financials, notably banks, in the process of balance sheet repair. The small size allows the manager to diversify into more esoteric assets in which larger funds would struggle to take meaningful positions. For instance, it owns some short-dated investment trust convertibles and some floating-rate notes.