Jupiter Financials Contingent Capital Fund
Overview
The attractions of contingent convertible bonds, or “CoCos,” are numerous, and many of the world’s most sophisticated investors, including pension funds, sovereign wealth funds, insurance companies, private banks and family offices have recognised that CoCos have a potentially valuable role to play in a portfolio.
We believe that CoCos deserve a place in a broad range of portfolios and that now may be an ideal time to consider allocating to these versatile instruments.
- A CoCo is a type of security issued by banks and insurance companies.
- They were first issued after the global financial crisis and were designed to help ensure that financial institutions are sufficiently well capitalised.
- For investors, CoCos are a liquid asset class that can provide a yield comparable and, in some cases, better than high yield bonds but with a generally lower degree of credit risk, given the quality of CoCo issuers. CoCos’ volatility is also substantially lower than bank equity, and Coco coupon payments have so far never been cancelled.
- Designed after the financial crisis, with input and involvement from regulators
- A more cost-effective way for banks to raise capital than issuing new equity, hence the attraction for issuers
- Highly attractive yield, relative to the credit quality of the issuers
- Markedly lower realised price volatility than bank equity and historically better returns
- Issuance is reaching a peak and the market has probably reached a more mature phase
- Conversion triggers are set at very low capital levels and therefore are very unlikely to be reached unless a bank is already not viable
- In the last 10 years, banks have seen a significant improvement in their fundamentals, with reduced leverage, better asset quality and much stronger capital positions
Anecdotal evidence shows that some investors are unnecessarily avoiding holding CoCos because they believe they may be in intrinsically more complex than other instruments they are perfectly happy to hold.
We would argue that CoCos are, in reality, not much more complex than a normal callable bond – an instrument many fixed income investors would hold without giving the matter so much as a second thought. Indeed, more complex than the instruments themselves is the field of banking regulation – in itself, a strong case for choosing an active CoCo fund, run by managers with a deep understanding of bank capital structures and banking regulation.
Volatility | Yield | |
|---|---|---|
Jupiter Financials Contingent Capital Fund | 13.0% | 6.5% |
European Bank Equity (USD Hedged) | 34.5% | 5.2% |
Non-Financials Global Corporate High Yield (USD) | 9.1% | 5.4% |
Non-Financials Global Corporate Investment Grade (USD) | 7.4% | 3.2% |
Quoted yields are not a guide or guarantee for the expected level of distributions to be received. The yield may fluctuate significantly during times of extreme market and economic volatility. Source: Factset, Bloomberg. As of 03.31.22. Volatility run weekly annualized from inception (08.16.2017) to 03.31.22, fund share class I USD (Inc). Yield is USD Hedged yield to maturity for fund and fixed income indexes, USD hedged dividend yield for equity index. Bank equity is Euro Stoxx Banks Index, Non-Financials Global Corporate High Yield is IXE BoFA Non-Financials BB/B DM High Yield Index, Non-Financial Global Corporate Investment Grade Index is ICE
BoFA Global Non-Financials Corporate Index.
A great diversifier
CoCos have a relatively low, or negative, correlation with a number of key asset classes, giving an allocation to them the
potential to enhance overall portfolio diversification.
Source: FactSet as at 31.03.22. Correlation is with Bloomberg Barclays Contingent Capital Western Europe (USD Hedged), 31.05.14 toi 31.03.22. *Bloomberg Barclays US High Yield – Corporate (USD Unhedged) Index. S&P 500 Total Return Index, Euro Stoxx Banks USD, US Treasury Total Return USD.
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Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
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This communication provides information relating to Jupiter Financials Contingent Capital Fund (the “Fund”), which is a sub-fund of Jupiter Asset Management Series plc. Jupiter Asset Management Series plc is an investment company with variable capital established as an umbrella fund with segregated liability between sub-funds which is authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended. Registered in Ireland under registration number 271517. Registered office: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland.