BlueBay Asset Management has launched a dedicated contingent convertible bond fund to tap the growing market for the new-style hybrid debt being issued primarily by banking groups.
The Luxembourg-domiciled BlueBay Financial Capital Bond strategy was formally launched on 15 January.
While the market for hybrid bonds, known as CoCos, currently sits at around $100 billion, BlueBay said global issuance could reach $1 trillion over the next decade.
The company said the average yield for these bonds currently sits at around seven per cent, however, due to relatively gradual growth in the investor base, these yields could stay elevated for a decent amount of time.
The fund invests at least 50% of its assets in subordinated debt securities issued by financial institutions. Subordinated debt includes, but is not limited to, Tier 1 and Tier 2 contingent convertibles (CoCos) and US perpetual preferred stock.
BlueBay said the new fund would be team managed.
Commenting on the launch, Citywire AA-manager Raphael Robelin, co-CIO and co-head of investment grade debt, said BlueBay had been investing in CoCos since 2002 but the new fund represented a change in approach.
He said: ‘We believe that CoCos represent an attractive investment given the high yield on offer compared to most other asset classes.
‘As underlying credit quality in the banking sector continues to improve, we expect this is likely to lead to tightening of credit spreads over time, while the expectation of abundant supply highlights the sustainability of these investments.’
The launch of the fund comes as UBP’s head of global and absolute return, Christel Rendu de Lint, warned investors over the complexity of CoCos and suggested only dedicated investors should target these instruments.