March 2020

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  • 1. Why entering now in the GAM Star Credit Opportunities strategy?

    Context:

    Considering current prices, we have been asked our view on the current valuations and the opportunities we see on the subordinated bond space

    Impact for the fund: We value current valuations as an extremely attractive entry point for the funds

    • Why bonds: Second quarter 2020 will most likely be remembered as one of the worst quarters for global GDP growth since World War II. In time of uncertainty, investors are better off owning bonds than equity.
    • Why the financial sector: this is the most regulated market and has been stress-tested by regulators, so we know that the sector can absorb external shocks such as Covid-19. Covid-19 is an earnings story for sure, but not a balance sheet story.
    • Why sub-debt for financial sector: investors benefit from the strong credit quality of these issuers & benefit from a significant higher income.
    • The power of pull-to-par: while income is steady, price of a bond fluctuates but, as long as default risk doesn’t increase, it always converges toward par value. So if price of the bond declines, but default risk doesn’t change, this creates an unique opportunity to invest.
    • Extension risk as a buying opportunity: when callable perps priced to perp, because of weak market conditions, these tend to gradually reprice to next call date as soon as situation stabilizes. Which means potential for high capital gains.
    • Legacy bonds: while price of bonds have declined, regulatory framework has not changed, meaning that free option in terms of capital gains just increased as issuers will need to take these bonds out.
    • Historic record of bounce back: We just experienced one of the biggest monthly drawdowns since 1985, with no change in the credit fundamentals, each time this happened, prices of our bond recovered within 6-9 months.Risk: while fundamental are strong and valuation levels are extraordinary cheap, there will likely remain volatility in the markets. Therefore, we see price volatility as the key risk for subordinated bondholders.

     

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