Cairn closes two-year-old sub debt fund after beating targets

January 08, 2014  

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Credit specialist Cairn Capital has announced the closure of its Cairn Subordinated Financials Fund after just over two years, having notched up returns of 65% and a very strong risk-adjusted performance.

The redemption of all the shares in the fund took place on 31 December and all the proceeds have been returned to investors – two thirds of whom have chosen to reinvest in other Cairn Capital products, according to the firm.

The fund generated a net return of 64.92% from its launch in October 2011 to the end of December 2013, giving an annualised return of 25.89% on an annualised weekly volatility over the life of the fund of just 7.33%.

"We have managed dedicated legacy subordinated financials mandates since 2009 and launched the fund in October 2011 at the height of the systemic crisis, when we saw deep value even though others were exiting," said senior portfolio manager Philippe Kellerhals.

"Performance beat our expectations and we no longer believe the strategy can continue to produce these types of returns. The opportunity set in subordinated financials is narrower now and better suited to higher conviction, more focused positioning or as part of a broader credit strategy."

Andrew Jackson, Cairn’s chief investment officer, added: "Investors in the fund have enjoyed strong returns and now that the value to support a dedicated fund has passed we feel it is appropriate to return investors’ capital."

He added: "Subordinated financials continues to be a very active asset class for Cairn Capital, but more effectively pursued as part of broader mandates. We are particularly pleased that to date 68% of the capital previously in dedicated subordinated financials strategies has subsequently been or is expected to be re-invested with Cairn Capital – primarily in broader, multi-credit asset class strategies."

Along with the redemption of the fund, Cairn has also returned or reallocated capital in all dedicated legacy subordinated financials mandates managed by the firm. These segregated mandates, which had been in operation since mid-2009, generated returns in excess of 110%. The firm said that over £278 million of investor capital has been returned or reallocated.

"Cairn Capital sees attractive value in only a limited number of subordinated financials bonds on both an absolute and relative basis which no longer supports a thematic long-biased fund," the firm said in a statement.

"Instead, Cairn feels that those narrower opportunities can be better exploited in a broader corporate high yield and crossover strategy which can extract alpha from the remaining opportunities in subordinated financials as well as in other non-financial sectors."

London-based Cairn is a credit asset management and advisory firm that was set up in 2004. It provides a full-service credit asset management, advisory and securities restructuring platform with a particular focus on the European credit markets. Its discretionary assets under management as at 31 November 2013 were $3.34 billion.

The firm launched the Subordinated Financials Fund in 2011 to exploit the significant price dislocation of legacy subordinated debt issued by financial institutions as a result of heightened sovereign debt concerns and the perceived poor capital and liquidity position of European banks.

From the outset the fund was expected to have a limited lifetime, targeting a return of at least 25% over the first year and annualised double-digit returns thereafter. However, returns were fuelled as strong central bank liquidity support, reduced sovereign concerns and positive steps by banks to strengthen their capital ratios and reduce leverage all contributed to lower risk premia – pushing up the prices of legacy subordinated debt.

As a result, the firm said, the deep value that Cairn had identified at the time of the fund’s launch – affording the opportunity to generate significant alpha in a market characterised by distress and volatility – had been extracted in a shorter time period than originally envisaged, although it added that the opportunistic nature of the strategy and the finite timescale for its execution had been clearly identified at the fund’s inception.

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