November 2020

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  • 1. Has your view on the fundamentals of the financials sector changed following the release of Q3 2020 results?

    Fundamentals of European banks and insurers continue to be very strong and resilient, despite Covid-19 uncertainty. Q3 bank results have surprised positively and were ahead of expectations and positive from a credit perspective as banks continue to accumulate excess capital and loan loss provisions declined close to preCovid-19 levels.
    There are three main trends that stand out:
    • Loan loss provisions have declined materially as banks have front-loaded in the first half.
    • Capital ratios continue to rise and excess capital positions are now well above pre-Covid-19 levels.
    • Profitability momentum has started to improve and, on aggregate, pre-provision profits of the sector have been more than sufficient to absorb higher credit losses. On capital, banks continue to manage their balance sheets conservatively and accumulate capital to protect bondholders from uncertainty. Combined with regulatory easing, this has led to excess capital positions reaching all-time highs. Taking HSBC as an example, excess capital rose from USD 29 billion in FY 2019 to USD 40 billion in Q3 2020, reflecting strong capital accumulation as the group’s common equity tier one ratio (CET1) now stands at 15.6%, compared to 14.7% in FY 2019.

  • 2. Why are the USD fund’s holdings mostly concentrated in EU and UK entities instead of US-based companies?

    The currency of the holdings in the USD fund are predominantly in USD, although the exposure to US banks remains relatively limited.
    • We have a focus on European / UK financials given our expertise in this area, and we see regulation as a stronger catalyst in Europe which is positive for bondholders.
    • In terms of valuations, subordinated debt of European financials offer more attractive spreads / yields than US financials.
    * The full legal name of the funds are GAM Star Fund plc. – GAM Star Credit Opportunities (USD), GAM Star Fund plc. – GAM Star Credit Opportunities (GBP) and GAM Star Fund plc. – GAM Star Credit Opportunities (EUR).
    The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Allocations and holdings are subject to change. Past performance is not an indicator of future performance and current or future trends.
    The gross performance does not include the effect of commissions, fees and other charges, which may
    have a negative effect on the net performance. The views expressed herein are those of the manager at the time and are subject to change.
    Furthermore, the historical circa 30% exposure to UK financial institutions is reflected by:
    • Banks in the UK, such as HSBC and Standard Chartered, are extremely well diversified geographically and are therefore not UK-focused banks, per se.
    • National champions like Lloyds and RBS have strong fundamentals and are focused on domestic retail banking.

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