Harvesting high yields with CoCos
The attractions of “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 they have a potentially valuable role to play in a portfolio.

CoCos have the potential to offer a yield in excess of that delivered by European bank equities and corporate High Yield bonds, but with lower volatility. CoCos can also have low correlations with government and corporate bonds, and thus provide investors with diversification.

The fund intends to provide access to the growing opportunities of contingent convertible bonds (CoCos) with the aim of generating a total return.
Specialist knowledge
Managed by Luca Evangelisti, the fund aims to give investors access to a portfolio that takes advantage of opportunities in contingent capital bonds issued by banks and insurance companies, also known as contingent convertible bonds.

CoCos have been a fast-growing asset class, with the increase in their issuance driven by regulatory change. CoCos were created in the wake of the global financial crisis of 2007-08, in order to increase the ability of banks to bear losses beyond their equity buffers. Regulators have encouraged issuance of the securities.

CoCos are a form of hybrid-subordinated debt security that can convert into equity or have their principal written down if certain triggers occur. To compensate investors for this remote risk, CoCos typically offer a significantly higher rate of interest compared to other kinds of bonds.

Although a large and highly liquid asset class, managing a portfolio of CoCos requires specialist knowledge. The fund manager has a wealth of experience: Luca Evangelisti has been involved with the asset class since the early days of its inception. He has invested across the capital structure and is the lead decision maker for financial credit in Jupiter’s flagship Unconstrained Bond Strategy.

Striking a balance

The fund aims to provide investors with a combination of income and capital growth from a portfolio primarily invested in CoCos. The fund manager focuses on selecting high quality issuers, whose CoCos have a lower likelihood of coupon suspension and remote conversion risk. The fund will typically look to invest at least 75% in CoCos, with up to 25% in a combination of cash, government bonds and corporate bonds.
Tried and tested
The fund has a robust, structured and repeatable five-stage process. It aims to select the highest quality and best value issuers, which in the manager’s opinion have the strongest balance sheets and capital generation characteristics. The manager focuses on CoCos that in his view have the lowest likelihood of missing coupon payments. Through detailed fundamental analysis and asset quality stress testing he seeks to calculate whether issuers will have sufficient capital and reserves in the future to pay coupons and to maintain adequate buffers above the conversion triggers. The manager also focuses on assessing and valuing the extension risk of each security and aims to invest in CoCos whose likelihood of redemption at first call date is high.
Risk management is key
The fund is monitored by Jupiter’s dedicated fixed income risk officer. The risk officer is able to use the latest risk models accessed via a leading provider of risk-management systems and is able to incorporate new metrics into the models as the manager’s strategy evolves

Meet the team

The fund manager, Luca Evangelisti, has been involved with contingent convertible bonds since the early days of their inception. Luca has invested across the capital structure and is the lead decision maker for Financials credit in Jupiter’s flagship Unconstrained Bond strategy. Luca is also manager of a Financials sleeve in the Flexible Multi-Asset strategy for Talib Sheikh. In addition to managing the Jupiter Financials Contingent Capital Fund, he is Head of Credit Research in the Fixed Income team.

Luca is supported by a dedicated Financials analyst (Paul Pulickal) within Jupiter’s wider Fixed Income team. They benefit from collaboration across Jupiter’s investment teams, including with Financials equity specialist (Guy de Blonay) and across Equity teams.

Dedicated team

Wider considerations

Important information

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.

 

Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall. 20443

 

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.