GAM credit opportunities manager fears for mainstream bonds

GAM Star Credit Opportunities manager Anthony Smouha is backing sub-ordinated debt and discounted floating rate notes to power performance in 2013.

Smouha, who works for Swiss-based bond boutique Atlanticomnium, says the credit market continues to offer opportunities – even if bonds are nearing the end of their 30-year bull run.

He adds that investors must look beyond the mainstream, with subordinated and undated financials debt offering attractive valuations and yield opportunities. The fund currently holds undated debt issued by Aberdeen, Bank of Scotland and Barclays – the latter two yielding over 8%.

‘Mainstream bonds in our view are not a great place to be, as you are getting very small returns. We think rates will stay low for some time but one day they will go up; you know mainstream bonds will not be very good so we avoid a lot of them,’ Smouha says.

Playing the recovery in financials

He now works alongside his brother Jeremy Smouha (pictured), a co-founder of GAM, who has joined Atlanticomnium to grow its new London office.

Jeremy says: ‘Our approach is to look at a good quality company and a bit like an equity analyst, we say: “What if things go well?”

‘Most bond managers look at investing in a bond and say, “If something goes wrong, what will I get?”. We look at “if something goes right, what do I get? So that allows us to do a Warren Buffett-type margin of safety analysis of an equity and then if we are reassured or have a strong view that a company, and the junior debt,  is going to survive, then we are quite happy to take the extra yield,’ he says.

While some investors have benefited from banks’ share price gains since the summer, Smouha highlights how the fund has accessed improved capital adequacy and gradual recovery in the UK and European banking sector over the past three years through credit opportunities, which he says can offer a less volatile way to access the recovery.

‘We have liked the story of self-improvement, of coming out the crisis at the major clearing banks Barclays, Lloyds and RBS – where you have to move to make these banks more safe and solid,’ he says.