Axiom Alternative Investments, a specialist in instruments issued by financial institutions, today announces the launch of Axiom Contingent Capital, a French-regulated investment fund dedicated to Additional Tier 1 and Tier 2 Contingent Convertibles, or ‘CoCos’, the new generation of bank subordinated debt instruments.
The implementation of Basel III requirements gave birth to a new generation of bank subordinated bonds, which amounted to 100 billion euros as at the end of 2014 and could reach several hundred billion euros in the coming years. Additional Tier 1 and Tier 2 CoCos were created to replace legacy bonds, which did not fully serve their purpose as capital instruments for banks. The new fund will take advantage of the high yields offered by this new asset class through the careful selection of issuers and the close monitoring of conversion risk and potential coupon suspension.
Axiom Contingent Capital will aim to outperform its benchmark, the Bank of America Merrill Lynch Contingent Convertible Index, through a focus on bonds from the large systemic European banks (c.90% of the Fund’s exposure).
The Fund’s investment process is based on a dual approach: 1. Fundamental analysis to identify long-term positive and negative views: Risk analysis: credit risk (in-house stress tests, buffer calculations, assessment of issuer credit risk), coupon risk (MDA calculation, volatility analysis, etc), market risk (relative value model, tracking error) Legal and regulatory analysis (prospectus, regulatory catalysts, etc) 2. In-house relative value model: identifying buy/sell zones based on market prices Buy/sell signals
David Benamou, Managing Partner, Axiom Alternative Investments, commented:
“We see a significant opportunity in this new generation of subordinated debt which is emerging as a result of Basel III with the aim of replacing legacy bonds by 2022. We are aware that some investors, particularly those in the wealth management sector, are struggling to access this asset class, so believe that our UCITS-compliant offering will provide an effective solution.
“These instruments offer high yields compared to other asset classes and, with a focus on instruments issued by large European banks, we are confident of delivering attractive long term returns to investors.”