Context: The EUR fund has been performing differently than the USD fund when compared to the Bloomberg Barclays AT1 CoCo indexes EUR and USD respectively
The difference in performance between the EUR fund and USD fund when compared to the AT1 coco EUR and USD indexes respectively are mainly due to the higher proportion of high beta names in the EUR AT1 CoCo Index. While the USD AT1 CoCo index is dominated by the higher quality names that we hold like HSBC, UBS, CS, etc (and therefore is a closer proxy of the AT1s we hold in the USD Fund), over the past few years we have seen more lower quality/higher beta issuance in EUR AT1 CoCos. In particular this has been either smaller names or peripheral names (Italy/Spain), of which we have obviously stayed away from given the weaker fundamentals (15% of the index is now Italy and 28% Spain). Nevertheless, as sentiment has been very strong, these names have outperformed the higher quality names. For example, see the chart below comparing the performance of a few second-tier peripheral names (Banco BPM, an Italian bank or Bankia a Spanish Bank) against Rabobank or HSBC. As these weaker names in the Periphery are more exposed to idiosyncratic events as well as political issues (Italy for example) – this can lead to very poor outcomes for bondholders (Banco Popular for example) as well as very high volatility (see the chart of Monte dei Paschi’s Tier 2 falling to 45% in early 2019).