General Motors Asset Management (GMAM), which has about $148 billion in assets under management, invests in structured credit. Its Promark Alternative High Yield fund has primarily bought CDO equity tranches.
GMAM will not say how much it has invested in structured credit, but the total figure is about $400 million. That could grow. GMAM has set up its Alpha portfolio to invest some of the money raised to fill its pensions gap. The structured credit strategy in Alpha targets an annual return of 250 basis points over Libor with as low volatility as possible.
?Structured credit investments allow us to take exposure to the risk of traditional asset classes in a more efficient way,? says Boris Rjavinski, a portfolio manager for GMAM's fixed-income group. ?Participating in structured transactions allows us to zero in on the risk we are looking to take, that is, the credit risk of underlying assets, and avoid exposure to the interest rate risk embedded in most fixed-income instruments. As an investor in a CDO, we are most concerned with the ability of underlying assets to continue to generate cashflows, and not as much with the volatility of their market price.?
Structural customization
As a long-term investor, GMAM can take the greater risk premiums of less liquid structured investments. And getting deals tailored to its requirements doesn't decrease with the amount it is investing. ?A $20 million to $30 million investment can drive a large transaction, allowing us to get a structure and terms that are customized to our preferences,? says Rjavinski.
GMAM recently invested in Pillars, a synthetic CDO managed by State Street Research and Management (SSRM). Pillars appealed to GMAM because it is backed by a mixture of corporate names and mezzanine RMBS. Around 90% of the risk was placed synthetically through a super-senior swap, which keeps the cost of financing the assets relatively low. Pillars is also structured so that excess spread is diverted into a reserve fund, lowering the volatility of GMAM's investment when the market comes under stress. It was features like these, and the presence of a successful CDO manager, that persuaded GMAM to invest.
GMAM's investment policy and guidelines limit the types of deals it invests in. ?Our strategy avoids taking directional bets on broad markets, which is what a lot of existing structured derivatives are tailored to, including tranched and untranched credit indices,? says Rjavinski. ?Anybody looking to use derivatives as a simple substitute or extension of traditional asset classes has to be mindful of the types of risks that go along with them. These instruments are levered, very model-driven, and beholden to the counterparties' willingness to provide liquidity.?
The overriding criteria involve GMAM's managers feeling comfortable with the risk of the underlying, and their belief that the proposed structure provides an efficient way of taking exposure to that risk. ?We are not in pursuit of the most exotic investments or the hottest derivatives,? says Rjavinski.