Old Mutual Global Investors (OMGI), is launching a new style convertible bonds equity/debt hybrid fund, the first of a new ‘CoCos’ strategy from the firm.
The Old Mutual Financials Contingent Capital fund, will be managed by Lloyd Harris and Rob James from OMGI’s equity and credit desks based in London.
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, OMGI said.
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.
The fund 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.
It will typically look to invest at least 75% in high-quality contingent convertible bonds (CoCos), with up to 25% in a combination of equity instruments, collective investment schemes, cash, government or other bonds, OMGI said in a statement announcing the launch.
Fund manager Harris also manages the Old Mutual Corporate Bond Fund, has 10 years’ experience covering the financials credit sector and James has worked as a financials equity analyst for over 24 years.
Harris said that OMGI’s fixed income funds have invested in contingent capital for some time, but this is the first fund dedicated to this style of investing.
‘Post financial crisis’
“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,” he said. “There are very few opportunities to earn such an attractive yield, especially in a sector that, post financial crisis, is extremely tightly regulated.”
The fund’s co-manager James added that 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,” said James. “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.”