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Gildas Surry, Axiom Alternative Investments European Financial Debt Fund

Banking regulatory change reaps opportunities for specialist fund

Gildas Surry(pictured) is the analyst and fund manager of Axiom Alternative Investments European Financial Debt Fund. The fund was launched in November 2015, just five months after Surry joined the firm, and currently has GBP60 million under management. Overall, Axiom has EUR700 million under management.

The fund invests in fixed income instruments issued by banks, seeking to identify investment opportunities across the EUR500 billion plus universe from the transition to Basel IV and Solvency II in Europe.

“You can view this fund as a high yield fund dedicated to fixed income financials,” Surry says. Year to date performance as of 10 March is 4.73 per cent.

Operationally, Brexit won’t affect the fund, Surry believes. “It will, from the investment perspective, create plenty of opportunities,” he says, “because the market will be more atomised and fragmented across the regions and there will be different regulatory frameworks between the EU and the UK which will cause some mispricing opportunities.”

The investment process is rigorous. “First, we analyse the fundamentals and then gauge the regulatory framework around the financial institution and take a view on the regulator/regulatee relationship,” Surry says.

The fund is principally invested in western Europe, one third in the UK, 20 per cent in Germany, about 12 per cent in France and the balance split across Spain, Austria, Denmark, the Netherlands and Italy.

The firm is currently invested in Lloyds Banking Group in the UK. “It has a very strong and liquid balance sheet as a lot has been done by the current management. It is a very stable and profitable business that shies away from investment banking activities and is domestically focused with a strong market share.

“The legacy issues such as PPI are something which is just coming to an end and in our view the line has been drawn below most of its potential litigations.

“If you are a debt investor in Lloyds, there are many opportunities because of the complex balance sheet combining many different entities like Halifax, Bank of Scotland or even Cheltenham & Gloucester. What makes it even more interesting now is that, under the Vickers Commission rules, combined with the latest PRA regulations, Lloyds has no choice but to simplify its capital stack further by 2019.

“Lloyds went for a maximised ring fence with all of the bank in it, and is now left with a lot of debt instruments that are losing their regulatory recognition or funding efficiency. We selectively buy these at discounted prices in the secondary market,” Surry explains.

Typically, Surry says, he likes to choose a strong bank or financial institution and spend a lot of time screening the debt instruments that sit in the balance sheet and choose the ones that will be taken out under Basel III as they will not be eligible anymore.

“This kind of transition from Basel II to III is a unique opportunity to capture value in the sector as bank fundamentals, together with debt liabilities, adapt to a new norm,” Surry says.

Wealth management platforms, family offices and some institutional investors invest in the fund. 

“In the 20 years I have been covering the European banking sector, I can’t recall a period driving so much change to the balance sheets and the debt instruments in issue,” Surry says.

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