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GAM star: all the black swans have gone
by Robert St George on Sep 17, 2013 at 11:19
Jeremy Smouha, chief executive of Atlanticomnium and manager of the GAM Star Credit Opportunities fund, has argued that government action has inoculated financial systems from contagious catastrophes.
‘Reducing unemployment has become a clearly stated priority for authorities,’ explained Smouha (pictured). ‘As a result they will work hard to avoid systemic crises which are bad for unemployment. We therefore do not expect any more black swans to appear.’
Rather, Smouha predicted the rise of the ‘white swan’ event – periodic crises with which states and businesses can cope.
This bullishness has left Smouha sanguine in the face of the market’s flight from fixed income. ‘Market weaknesses provide significant buying opportunities,’ he asserted. ‘Unlike equities, bonds have a defined terminal value, so any weakness in price provides an opportunity to lock in future returns and benefit from the subsequent price recovery. In turbulent times investors should wait patiently and use the opportunity to add to their favourite positions.’
Smouha therefore expressed confidence in moving his portfolio further up the risk spectrum, for example into junior debt issued by banks. He contended that new regulation, including Basel III and Solvency II, had been ‘very supportive’ for such paper.
‘Regulators are seeking to make the financial sector safer by forcing banks and insurers to increase their equity and reduce their risk in order to strengthen their balance sheets,’ Smouha commented. He noted that they have done so in part by issuing equity and contingent convertible bonds.
‘As both instruments are subordinate to the existing junior debt, our existing junior debt moves up in seniority,’ continued Smouha. He cited Barclays as a recent case in point, whose announcement of a fund-raising programme depressed its share price but boosted the value of its bonds.
So far this year the GAM Star Credit Opportunities fund has returned 9.7% up to the end of August, compared with 0.4% from the Barclays Euro Aggregate Corporate Total Return index.
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by Danielle Levy on Dec 06, 2013 at 07:46