Credit crisis presents opportunities

New Zealand Funds Management's $400 million Super Yield Fund has only been marginally affected by the US sub-prime mortgage crisis, says principal Richard James.

Friday, August 17th 2007, 5:29AM

by Jenny Ruth

About 50% of the fund is invested in structured credit products but less than 2% of it is exposed to sub-prime related securities and less than 1% is exposed to "the troubled 2006 vintage," James says.

In the three months to the end of July, the fund's value was down just 0.43% and it has fallen about another 50 basis points since then.

"Our exposure to the bad assets is extremely limited."

The fund also has more than $100 million in cash at the moment.

James says that if it was a closed fund, "we would probably be an active buyer" because a lot of fixed interest assets are being sold for quite silly prices.

James says the term CDO - collateralised debt obligations - has become a sort of catch-all label for the current turmoil but a lot of his firm's exposure is to CLOs - collateralised loan obligations - which are loans to corporates.

While the assets underlying some CDOs, such as sub-prime loans but can also be car loans or consumer finance, are highly likely to default but corporate loans are highly unlikely to default, James says. About 25% of his fund's portfolio matures with three years.

"Most of those loans are bought off banks and the lending processes of big corporate banks are generally going to be a lot more robust than second or third tier lenders on the main street of Ohio or wherever."

Nevertheless, all those sort of products are being caught up in the wake of the sub-prime crisis.

"(Corporate) defaults are at decade-long lows. The probability of receiving all your capital back and all of your interest remains high."

The fund's investment guideline is that investors should have a three to seven year horizon and most investors in it are looking for income.

"The running yield of the fund has gone up as a result of prices falling slightly. It's probably north of 10% after fees if there are no further revaluations - that's a big if - and that's a compelling risk/return proposition," James says.

Virtually all NZ Funds Management's clients come to it through advisers and he's hoping most will decide to remain in the fund.

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