Top credit manager Anthony Smouha has pounced on European financial corporates as structural and regulatory changes have created ‘unique opportunities’ in that space.
Citywire AA-rated Smouha highlighted the success of centralized banking oversight in the European Union as one of the factors supporting the sector, as well as a regulatory framework called Basel III that aims to boost capital ratios.
‘Before the global financial crisis, the European banking union only existed on paper but now we have the European Central Bank (ECB) supervising it. Implementation of Basel III forced European Union banks to increase [part of their capital requirement] ratio from on average 7% to almost 15%. This makes them safer, stronger and more resilient.’
‘...Finally, Europe is growing, indicated by 17 consecutive quarters of GDP growth and this growth is organic as stemming from consumers – a virtuous cycle, as [ECB president Mario] Draghi calls it,’ said Smouha, a manager with Swiss firm Atlanticomnium who runs the GAM Star Credit Opportunities fund through a subadvisor deal.
Seven out of Smouha’s 10 top holdings as of October 31 were bonds by European financial issuers, according to the fund’s factsheet. One HSBC issue accounted for 4.3% of the portfolio, while a batch of Societe Generale bonds made up 3.7% of the fund.
As much as Smouha likes European financials, he doesn’t own Portuguese or Italian banks and is selective about investing in countries such as the UK, France or Spain, he said.
Looking more broadly, Smouha favors global financial brands because of improved credit metrics, regulations aimed at making these institutions sounder, and the prospect of higher rates, which tend to increase margins in the sector.
In general, Smouha focuses on investment grade or high-quality issuers. He said he’s capturing spreads almost three times higher than he did before the financial crisis, so he hasn’t had to dip into the high yield or crossover spaces.
‘We are still finding plenty of opportunities in the subordinated and corporate hybrid market of investment grade issuers and the market has been expanding over the last few years, so we have been “sticking to our knitting,”’ he said.
In the past three years, Smouha’s fund has returned 18.69%, while its Citywire assigned benchmark, the ICE BofAML European Currency HY TR EUR Hdg has risen 11.09%.