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Anthony Smouha

GAM marks fifth anniversary of Star Credit Opportunities funds


This month marks the five-year anniversary of the three successful GAM Star Credit Opportunities funds (EUR, USD and GDP) managed by Atlanticomnium SA in Geneva. 

The funds have delivered strong performance in spite of many challenges during the period, including eurozone crises in various iterations, Russia’s slowdown, worries over the Chinese economy, as well as the latest political turmoil from the UK’s Brexit vote. Investors have enjoyed a total return of 53 per cent in the EUR fund, 60 per cent in the GBP fund and 44 per cent in the USD fund since launch.

The funds have delivered what they were designed to do: provide investors with an attractive annualised return. Since launch the portfolios have been managed by the same team, Anthony Smouha (pictured) and Grégoire Mivelaz. At the heart of their investment philosophy lies the fact that investment grade companies rarely default, and by extension, junior debt of such companies rarely defaults. By participating in junior or subordinated issues of quality companies, the team can obtain the higher returns on offer, for the same default risk.  

GAM believes that the current low-yield environment may well be present for much longer than market participants expect. Changes in official interest rates of the major developed economies over the past few decades have been challenging for traditional bond investors to navigate. For example, Japan’s rates moved close to zero around 20 years ago, which is where they still are today.
Smouha says: “As government bonds yield virtually nothing, this makes the coupons that we clip on our bonds so much more valuable than at any point in the past. Of course, interest rates will eventually go up, but a mere 20 bps rise in 10-year US Treasuries is enough to wipe out one year’s income on them. At a 6 per cent yield we believe that the yield cushion on our portfolios will be very useful when that happens. That cushion will even withstand much more aggressive tightening, while our floating rate notes will actually benefit from any increase, acting as a hedge.”

Mivelaz adds: “Bond investors are on a desperate search for yield. Investing in subordinated bonds of high-quality companies can provide this return, whereas equities can disappoint. While investing in subordinated debt has always been rewarding, its higher income was historically more marginal compared with plain vanilla bonds. Today, however, subordinated debt pays a multiple of senior debt. This means that the same capital can realise maybe three times as much income annually, which makes a huge difference for income-seeking institutions or individuals.”

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