Old Mutual Global Investors (OMGI) has launched a contingent convertible (CoCo) bond fund.
The Old Mutual Financials Contingent Capital fund will look to invest at least 75% of its assets in what it deems high quality CoCos with up to 25% in a blend of equity, funds, cash and bonds.
The fund will be run by Lloyd Harris (pictured) and Rob James. Harris also runs the Old Mutual Corporate Bond fund and has covered the financials sector for 10 years, while James has been an equity analyst covering financials for over 24 years.
The pair believe that CoCos, which were created after the financial crisis to help increase banks’ ability to absorb losses beyond their equity buffers, have a low likelihood of being converted.
The hybrid structure means that they typically pay a lower rate of interest, but have lower volatility than equities, acting as an income diversifier.
Harris said: ‘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.’
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.’