Eight reasons to consider an actively managed ‘coco’ fund.
A “coco” or “contingent convertible” bond is a type of security issued by banks and insurance companies. They were first issued after the financial crisis, and were designed expressly to help ensure that banks are sufficiently well capitalised to survive another severe shock to the global financial system.
Cocos offer a much higher margin of safety than some investors may realise.
Choose your cocos carefully, and understand your risks.
Cocos offer attractive low correlation characteristics.
Cocos offer a degree of protection from longer term rate hikes.
The Merian Financials Contingent Capital Fund has a robust, structured and repeatable four-stage process. Its aim is to select the highest quality and best value issuers, which in the managers’ opinion have the strongest balance sheets and capital generation characteristics. The managers focus on cocos that have the lowest likelihood of missing coupon payments, in their view. Through detailed analysis of available distributable items and by making forecasts of retentions, they seek to predict whether issuers will have sufficient reserves in the future to pay coupons. They also aim to invest in cocos whose likelihood of conversion is remote.
Lloyd Harris and Rob James manage the fund. Lloyd is a member of the Merian Global Investors fixed income team, led by Mark Nash, while Rob is a member of our UK equity team, headed by Richard Buxton. Combining expertise in debt and equity analysis, both fund managers have extensive experience in analysing banks and insurers. Huw Davies, investment director for fixed income, provides additional knowledge and experience in capital markets.