Leading subordinate financial debt fund Groupama Axiom Legacy 21 announces that it has reached €364 million in assets under management (as at May 11th, 2018), one month before its first-year anniversary.
The fund, whose management is delegated by Groupama Asset Management to the financial specialists at Axiom Alternative Investments, targets subordinated “legacy” debt, which issuers should call when they lose their regulatory capital status (by the end of 2021 for banks and by the end of 2026 for insurance companies). This specific asset class is proving particularly popular with investors and still has a large target market of approximately €150 billion of securities in Europe, offering numerous investment opportunities.
Groupama Axiom Legacy 21 seeks to achieve an annualized return equal to or higher than the three-month Euribor +3% (after deduction of management fees), over a recommended minimum investment horizon of four years.
Capitalizing on investment opportunities offered by the transformation of the financial sector
The fund’s management strategy relies on the historical transition of the European banking sector towards a new cycle (change in economic models, favorable interest rate environment for financial institutions) and the implementation of the new Basel III and Solvency 2 regulations.
The Basel III agreements redefine the regulatory requirements for banks to strengthen their capital. Thus, a new format of subordinated debt (the AT1, Additional Tier 1 *) was created to replace the old Legacy debt Instruments, which was deemed too favorable to investors.
The Basel Committee has set a transitional period from Basel II to Basel III until 2021, for banks to meet the new capital requirements in terms of CET1 ** (Common Equity Tier 1). During this period, banks are encouraged to replace their existing legacy debt with new AT1 debt thus creating many opportunities for arbitrage. On the insurers’ side, the regulatory transition from Solvency 1 to Solvency 2, which will last until 2026 and which leads to the disqualification of the old securities from the regulatory capital, has created a new subordinated debt format (Additional Tier 1) * and complex rules that provide further opportunities.
Composed mostly of subordinated debt issued by banks and insurance company portfolios, Groupama Legacy 21’s strategy is built around four key areas:
- Discounted securities, orphaned instruments that will lose their regulatory capital eligibility during the transition period and that offer possible capital gains when called or bought back by the issuer,
- “Fixed-to-fixed” securities, which have the specificity of having fixed coupons associated with moderate volatility and which may take the form of preference shares,
- “Long Calls” securities, the first call date of which falls after the end of the transition period offering potential attractive returns as well as capital gains when bought back by the issuer,
- Securities issued by financial institutions whose credit is improving and which offer potential for the valuation of the prices of their bonds.
Towards a new threshold of €800 million of assets under management
Since its inception on May 31st, 2017, Groupama Axiom Legacy 21 delivered a return of 3.55% (share P, as of 11/05/2018***). In a market environment affected by the return of volatility and normalization of central bank monetary policies, the fund’s strategy has delivered on its expectations, thanks to a relatively low rate risk (duration below two), an attractive yield and a unique choice of investment grade issuers.
David Benamou, Chief Investment Officer at Axiom Alternative Investments said:
“The market depth of the Legacy segment is quite substantial, which allows our management team to identify attractive securities. Under current market conditions, the fund could reach €800 million in assets under management while preserving our management capabilities and investment agility.”
Thierry Goudin, Head of Business Development at Groupama AM said:
“We are satisfied with the successful launch of the fund, both in terms of its performance in an uncertain market environment and in terms of progress of the assets under management. Professional investors are becoming increasingly more receptive to this type of thematic solution, whose specific characteristics offer attractive risk-adjusted returns.”