Royal London Asset Management is looking to enter the credit derivatives market with the launch of a single-name credit-default swap trading mandate. The manager, which has more than GBP24.09 billion (USD43 billion) in assets under management, is exploring strategies to capitalize on CDS as an extension of its GBP10 billion (USD12 billion) fixed interest fund, which invests in U.K corporate bonds and gilts. No date has been set for the move.
Stephen Booth, fixed interest fund manager, said the manager will take advantage of its skills in single-name bond selection and apply it to synthetic credit bets. "We are interested in what [CDS] offer in terms of more diversification, greater leverage and increased liquidity," he said. He noted RLAM will proceed with a launch when it is comfortable with the swap spread risk of CDS trades; the point he says holds the most uncertainty and requires the most research.
The move to use synthetic instruments has been driven by the group's desire to diversify its credit business, as well as by interest from clients, which are predominately U.K. pension funds, life funds, investment trusts and unit trusts. "They have requested higher performing investments and more liability matching strategies," Booth said. RLAM is also interested in trading a sterling CDS index and is involved in discussions with The Royal Bank of Scotland to develop one (DW, 8/12).
Booth said there were no foreseeable factors which would halt the launch of a CDS business, but with few traditional long-only investors branching into credit derivatives RLAM would approach the initiative with caution. "We will use them carefully," he said.
