Credit funds

Our Credit Fund Management (CFM) team manages 17 credit funds comprising €5.5bn in senior loans and high yield bonds (as at 30 September 2011). We have one of the longest track records of any European institutional investor for European senior loans and high yield bonds, having started in 1999.

CFM investment philosophy

We believe that risk in the European leveraged finance markets is persistently mispriced due to three structural inefficiencies:

• Rating changes – New issue pricing is based on ratings at the ‘prevailing market rate’ rather than the underlying risk over a bond’s life. Up to 80% of high yield bonds undergo a rating change, demonstrating that the pricing based on the initial rating risk can change.
• Transparency – Levered finance is a specialist market requiring complex investment decisions but it has less published information than more widely researched public markets. This creates market inefficiencies.
• Risk appetite – Non-credit related factors such as risk appetite, strategic asset allocation and the overall liquidity of financial markets influence the credit markets. These changes in supply and demand impact leveraged finance for non-credit related reasons.

We seek to exploit these inefficiencies to create alpha – creating returns above the expected market returns. Our rigorous bottom-up research provides a real information advantage that drives our investment selection, significantly lowers our default rates and enables better management of recoveries.

Market cyclicality offers opportunities for longer-term investors with the experience and conviction to invest when prices are overcompensating for risk. We believe return normalisation takes time so a medium to long investment horizon is essential to generating alpha.

CFM competitive advantage

We believe in fundamental analysis and corporate information. This is the key to unlocking the inefficiencies caused by lack of transparency and persistent mispricings. We have the largest team of dedicated leveraged finance professionals in Europe providing fundamental analysis; six local European offices accessing local intelligence; and 20 years of relationships with financial partners providing extensive access to management teams and company information.