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Derivatives

U.K. Manager Ponders Single-Name CDS

Principal Global Investors (Australia) is looking to make its initial foray into collateralized debt obligations for its Aussie fund this year.

Principal Global Investors (Australia) is looking to make its initial foray into collateralized debt obligations for its Aussie fund this year. The group is part of Principal Global Investors, which has assets totaling over USD153 billion worldwide.

Rob da Silva, managing director of Asia-Pacific fixed income in Sydney, expects to begin investing in CDOs within six months or so for Principal Global Strategic Income Fund, with AUD50 million (USD36.6 million) under management. The move is linked to an expected growth in the size of the fund--tipped to triple this year--due to retail and institutional investors reallocating assets out of equity-linked funds, due to expectations the Aussie stock market will slow after three years of strong performance, he noted.

"We're looking at a lot of deals coming through--it's an exercise of sorting the good from the bad," said da Silva. Principal is studying a variety of structures including synthetic CDOs, CDO squareds and ABS CDO deals, mainly single A and BBB tranches. The manager is looking for yield: the investment target is 300 basis points over the domestic bank bill rate, currently at 5.5%. Da Silva continued the team will piggyback on the expertise of Principal's U.S. operation which already invests in credit products.

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