Old Mutual Global Investors (OMGI), part of Old Mutual Wealth, has launched its first ‘CoCos’ strategy, the Old Mutual Financials Contingent Capital Fund.
The fund, which will be managed by experts from OMGI’s equity and credit desks, aims to generate a total return through a combination of income and capital growth from a portfolio of fixed and variable rate debt securities issued by financial institutions with minimum capital requirements, such as insurers and banks. This launch is another example of OMGI’s commitment to creating innovative, in demand, investment products, designed to offer diversified returns.
The fund will typically look to invest at least 75 per cent in high-quality contingent convertible bonds (CoCos), with up to 25 per cent in a combination of equity instruments, collective investment schemes, cash, government or other bonds.
CoCos are a form of debt that can convert into equity or get written down when the regulatory capital of the issuer drops below a certain level. Created in the wake of the financial crisis, CoCos were designed to increase banks’ ability to bear losses beyond their equity buffers. They typically offer a higher rate of interest than traditional bonds, lower volatility than European bank equities and can act as a good income diversifier in portfolios.
OMGI’s fund will adopt a robust, structured and repeatable process with the managers aiming to invest in the highest-quality issuers, whose CoCos have a low likelihood of conversion, in their view. By investing in a diverse portfolio of CoCos from highly rated financial institutions primarily in the US, UK and Europe, the fund will aim to generate investment returns from a vastly improved and under-owned section of the market.
The fund managers, Lloyd Harris and Rob James, have a wealth of experience covering financials in both the equity and fixed income markets. Lloyd, who also manages the Old Mutual Corporate Bond Fund, has 10 years’ experience covering the financials credit sector and Rob, a member of OMGI’s award-winning UK equity team, has worked as a financials equity analyst for over 24 years. By combining the skill of credit and equity analysis, they are able to better understand this unique hybrid asset class.
Lloyd Harris, fund manager, says: “OMGI’s fixed income funds have invested in contingent capital for some time, with the team well-experienced in managing these investments. In our view, there is long-term value in the asset class; therefore, we believe that now is an appropriate time to launch a specific CoCos fund. There are very few opportunities to earn such an attractive yield, especially in a sector that, post financial crisis, is extremely tightly regulated. Our robust investment process aims to ensure that only the strongest, most capitalised institutions make it into the fund and only the most attractive bonds from those issuers are included as fund collateral.”
Rob James, fund manager, adds: “Following the financial crisis, banks, with the backing of their regulators, have improved the structure and safety of their balance sheets enormously. Large amounts of fresh equity were raised to strengthen capitalisation, but as part of the process a new form of capital, the CoCo, was introduced with the full support of regulators. This new asset class is a hybrid between equity and debt, and so falls between the two investor groups. This gives us, as specialists in the field, the opportunity to take advantage of the attractive returns available in a sector which is still very widely unloved.”