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Fixed income
25 Oct 2018

Food of the Gods

CoCos are a growing asset class with attractive yields and low volatility. What’s not to like?

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The cocoa tree was cultivated more than 3,000 years ago by the Aztec and Maya people. Its beans, when fermented and dried, are a key ingredient of chocolate. Mayans considered the cocoa tree to be sacred, and the bean was used as currency. The Aztec Emperor Montezuma reportedly drank his chocolate from golden cups.

The asset class known as CoCos, short for contingent convertible bonds, is a considerably newer invention but it too has attractive characteristics. They are a kind of hybrid-subordinated debt issued by banks and insurance companies. Regulators encouraged the creation of CoCos in the aftermath of the global financial crisis as a way for banks to boost capital while avoiding the risk of additional taxpayer bailouts.

Banks are fond of CoCos because they offer a cheaper way to raise capital than issuing equity. Investors like them because of their often attractive yields and low relative volatility.

Barclays, HSBC, UBS and Credit Suisse are among the banks that have issued CoCos


CoCos offer a way to participate in the improving performance of banks. Banks are back. They are generating solid profits with healthier balance sheets. Capital, the backstop that prevents banks from failing in the event of losses, has been significantly increased, and banks are stress tested to ensure they can withstand hypothetical losses that are five times larger than those seen in the global financial crisis.


CoCos offer income diversification through a partial hedge to rising rates and have a low correlation to corporate and government bonds. It’s also a growing asset class, with around €180bn issued since 2009. The mature market is expected to reach €250bn. Most CoCos convert to equity when the issuer is under extreme stress. They offer less protection to investors than senior debt and more than equity.


It’s not easy to find 8% yield with low relative volatility in today’s market. CoCos’ risk-adjusted yield has historically been considerably better than that of equities or senior debt.


We believe in using a robust, structured process to select the highest quality and best-value issues and to filter out the weaker offerings.

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