Old Mutual Global Investors (OMGI) has registered the Old Mutual Financials Contingent Capital Fund (its CoCos strategy) for institutional sale in Italy.
The $234.6m (€190.078m) fund, managed by experts from OMGI’s equity and credit desks, aims at generating 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 including insurers and banks.
The fund 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.
By investing in a diverse portfolio of CoCos from highly rated financial institutions primarily in the US, UK and Europe, OMGI’s CoCos strategy – launched in August 2017 – aims 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. Harris, who also manages the OMGI’s corporate bond funds, has over 10 years’ experience covering the financials credit sector and James, a member of OMGI’s award-winning UK equity team, has worked as a financial equity analyst for over 24 years.
CoCos, 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, were launched in the wake of the financial crisis designed to increase banks’ ability to bear losses beyond their equity buffers. This investment strategy typically offer a higher rate of interest than traditional bonds, lower volatility than European bank equities and can act as income diversifier in portfolios.
Cristiano Busnardo, Italy country head, said: “With volatility increasing across financial markets, Italian investors are increasingly looking for alternative investment opportunities offering stable, uncorrelated returns. With fixed income funds proving ever popular with Italian institutional investors, we believe there will be significant appetite for access to a non-traditional approach to this asset class.”
OMGI’s CoCos fund manager Lloyd Harris continued: “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. 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.”
Fund manager Rob James added: “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 and set to profit from global tightening of monetary policy.”