Consider subordinated debt as asset-liability match, says Cairn Capital
GLOBAL - Pension funds should consider subordinated debt investments to address the asset-liability mismatch currently facing a number of schemes, Cairn Capital has argued.
The asset manager insisted that the current market environment offered "excellent entry points" for investors looking to buy subordinated bonds in financial institutions.
Cairn said it was hoping to attract further institutional investors from Europe and further afield to its recently launched subordinated financials fund, in addition to the two schemes - Stanhope Pension Trust, a UK corporate pension fund, and the $6.12bn (€4.3bn) San Bernardino County Employees' Retirement Association - supplying €45m of seed capital.
Andrew Jackson, chief investment officer at Cairn Capital, said the company had spent the last two years discussing the best method of capital allocation with pension schemes in the UK, mainland Europe and the US.
"Many pension funds in these countries have an asset-liability mismatch and they are now looking to get back to balance," he said.
"For that reason, they are seeking to be more dynamic in their investment strategy", Jackson added. "Even though the pension funds we have been working with allocate only small amounts into such vehicles, they now believe the asset class offers more opportunistic strategies with the potential to generate outsized returns but with some protection on the downside."
The fund will invest in bonds issued by financial institutions from developed markets at the subordinated level with a particular focus on legacy instruments.
Senior portfolio manager at Cairn Capital, Philippe Kellerhals, added: "The market is under incredible stress at this point which is providing excellent entry points to certain assets that we think are mispriced, even under selected sovereign default and recessionary scenarios. Many of these assets are fundamentally sound but oversold."
The fund will invest primarily in Europe but might also target the US and Australia in the future.
Kellerhals went on to say: "We will have the ability to invest in other markets than Europe but this is unlikely to represent a big part of the portfolio.
"At the moment, we will focus on Europe where the value is and where we are going through a phase of capitulation in prices."