Sarasin Sterling Bond buys into Tier 1 debt

The manager of the £163m Sarasin Sterling Bond fund is adding subordinated financial debt to the portfolio because he believes the assets are undervalued in light of Basel III.

John Godley, the head of fixed income and manager of the fund, says the new regulatory framework will require financial institutions to issue a new type of Tier 1 capital, leading them to redeem existing issues. “Under Basel III, Tier 1 capital will have to be loss-absorbing, and most existing debt capital issues are not. This means financial institutions will have to issue new forms of qualifying Tier 1 capital, encouraging them to redeem the old stuff at the first call date,” he says. “Much of this Tier 1 debt is trading as if it will not be called, which we think is wrong.” Godl...