OMGI launches first CoCo fund as convertibles demand rises

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Old Mutual Global Investors has launched its first CoCos fund as new research suggests there is a resurgence in asset allocation to convertible bonds.

The Old Mutual Financials Contingent Capital fund will be managed by Lloyd Harris and Rob James with 75 per cent in contingent convertible bonds, while 25 per cent will go to equity instruments, collective investment schemes, cash, and government or other bonds. 

Harris already manages the Old Mutual Corporate Bond fund and has 10 years’ experience covering the financials credit sector, while James is part of OMGI’s UK equity team, with a focus on financials.

Harris says OMGI’s fixed income funds have invested in contingent capital for some time.

James adds: “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.”

CoCos typically offer a higher rate of interest than traditional bonds and lower volatility than European bank equities.

Research released by Cerulli Associates today says that interest rates trending upwards on both sides of the Atlantic will continue to fuel a “resurgence” in convertible bond allocations across Europe.

Last year European-domiciled convertible bond funds suffered outflows every month, but that has reversed in 2017 with assets reaching €2.6bn.

“As CBs ordinarily increase in price in the event of rising stock volatility, they should, in principle, offer a natural volatility hedge for insurers,” says Barbara Wall, managing director of Cerulli Associates Europe.

She notes Germany, France, and Switzerland have traditionally shown the keenest demand for the equity-bond hybrid, but demand is growing across Europe, including the UK, where the product has historically not gained much traction.