The fund aims to generate a total return through a combination of income and capital from a portfolio of fixed and variable rate debt securities issued by financial institutions with minimum capital requirements, such as insurers and banks.
To do this, managed by Lloyd Harris, who runs the Old Mutual Corporate Bond Fund, and Rob James, a member of the group’s UK equity team, the fund will typically look to invest at least 75% in high quality Cocos. The remaining 25% will be held in a combination of equity instruments, collective investment schemes, cash, government or other bonds.
Cocos are a form of debt that can convert into equity or get written down when the regulatory capital of the issuer drops below a certain level. Created in the wake of the financial crisis, they were designed to increase the ability of banks to bear losses beyond their equity buffers.
According to OMGI, Cocos typically offer a higher rate of interest than traditional bonds, lower volatility than European bank equities and can act as a good income diversifier in portfolios.
The fund will invest globally, holding Cocos from highly-rated institutions primarily in the US, UK and Europe.
“In our view, there is long-term value in the asset class,” Harris said. “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.”
James added: “This new asset class is a hybrid between equity and debt, and so falls between the two investor groups. This gives us the opportunity to take advantage of the attractive returns available in a sector which is still very widely unloved.”
