Almost a year after its launch Groupama Axiom Legacy 21 has surpassed the €350 million mark
Groupama Axiom Legacy 21 reaches €364 million in assets under management (as at May 11th, 2018), one month before its first-year anniversary. The fund, whose management is delegated by Groupama Asset Management to the financial specialists at Axiom AI is particularly popular with investors.
Invested in subordinate financial debt, Groupama Axiom Legacy 21 targets subordinated “legacy” debt, which issuers should call as and when they lose their regulatory capital status ; by the end of 2021 for banks and by the end of 2026 for insurance companies. This specific asset class still has a large market field of approximately 150 billion euros of securities in Europe, offering numerous investment opportunities.
Groupama Axiom Legacy 21 seeks to achieve an annualized return equal to or higher than the three-month Euribor +3% (after deduction of management fees), over a recommended minimum investment horizon of 4 years.
Capitalizing on the investment opportunities offered by the transformation of the financial sector
The fund’s management strategy relies on the historic transition of the European banking sector towards a new cycle (change in economic models, favorable interest rate environment for financial institutions) and the entry into force of the new Basel III and Solvency 2 regulations.
The Basel III agreements redefine the regulatory requirements for banks to strengthen their capital. Thus, a new format of subordinated debt (the AT1, Additional Tier 1 *) was created to replace the old Legacy debt Instruments, deemed too favorable to investors. As a reminder, the Basel Committee has set a transitional period from Basel II to Basel III until 2021, for banks to meet the new capital requirements in terms of CET1 ** (Common Equity Tier 1). During this period, banks are encouraged to replace their existing legacy debt with new AT1 debt thus creating many arbitrage opportunities in our financial domain.
On the insurers’ side, the regulatory transition from Solvency 1 to Solvency 2, which will last until 2026 and which leads to the disqualification of the old securities from the regulatory capital, has created a new subordinated debt format (Additional Tier 1) * and complex rules that provide further opportunities.
Composed mostly of subordinated debt issued by banks and insurance company portfolios, Groupama Legacy 21 is built around four themes :
- Discounted securities, orphaned instruments that will lose their regulatory capital eligibility during the transition period and that offer possible capital gains when called or bought back by the issuer,
- “Fixed-to-fixed” securities, which have the specificity of having fixed coupons associated with moderate volatility and which may take the form of preference shares,
- “Long Calls” securities, the first call date of which falls after the end of the transition period offering potential attractive returns as well as capital gains when bought back by the issuer,
- Securities issued by financial institutions whose credit is improving and which offer potential for the valuation of the prices of their bonds.
Towards a new threshold of €800 million of assets under management
Since its inception on May 31st, 2017, Groupama Axiom Legacy 21 shows a performance of 3.55% (share P, as of 11/05/2018***). In a market environment affected by the return of volatility and normalization of central bank monetary policies, the fund’s strategy has delivered satisfactory performances thanks to a relatively low rate risk (duration below 2), an attractive yield and a unique choice of investment grade issuers.
“The market depth of the Legacy segment is quite substantial which allows our management team to identify securities which we qualify as attractive. Under current market conditions, the fund could reach 800 million euros in assets under management while preserving our management capabilities and our investment agility”, said David Benamou, Responsable of Axom Alternative Investments.
We are satisfied with the successful launch of the fund, both in terms of behavior, given its performance in an uncertain market environment in recent months, and in terms of progress of the assets under management. Professional investors are becoming increasingly more receptive to this type of thematic solution, whose specific characteristics offer attractive risk-adjusted returns
Thierry Goudin
Head of Business Development at Groupama AM
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* Additional Tier 1: new subordinated debt format eligible for regulatory capital under Basel III, both for the solvency ratio and (partially) for the leverage ratio. The coupons are discretionary and the nominal value may be reduced either by converting into bonds (‘contingent convertible bonds” or “Coco”) or by reducing the nominal value which may subsequently be restored.
** Common Equity Tier 1: in the framework of Bale III, the Common Equity Tier 1 is the most robust form of regulatory capital, which mainly comprises capital (including shares) and undistributed reserves with certain deductions from “capital stock” (such as deferred tax assets). The ratio of CET1 is the ratio between the Common Equity Tier 1 capital and the Risk Weighted Assets (RWA), in other words the risk weighting. Therefore, the CET 1 does not include subordinated debt.
*** Please note that as the fund was launched in 2017, the performances here after are presented on a period
inferior to the fund’s recommended period of investment of 4 years. Past performance does not guarantee future
results