Navigating credit markets with a sailor’s mindset

As investors increasingly seek to diversify away from the US, demand for European credit is surging. Grégoire Mivelaz, Fund Manager at Atlanticomnium, who co-manages GAM’s Credit Opportunities strategies, emphasises the importance of active management, deep experience and disciplined positioning in subordinated debt investing.

09 September 2025

After a recent week of sailing, disconnected from markets and immersed in the serenity of the sea, I was reminded how much fund management mirrors life at sea. Watching those elegant boats, I saw clear parallels between navigating open waters and navigating markets.

You need a strong vessel, a skilled crew and a smart, active approach. For us, that is a portfolio built on high-quality issuers, with an average rating of A+, delivering yield through subordinated debt without compromising credit quality or liquidity. In today’s environment, we think staying close to home in the capital structure, favouring senior and Tier 2 debt, is key. With 40 years managing this strategy, our team brings discipline and experience. In uncertain times, investors want visibility and income. Bonds offer both, if managed with clarity and consistency. Passive exposure is not enough. April’s contingent convertible bond (CoCo) sell-off proved that active positioning can shield investors from volatility. The narrative is shifting: investors want more than beta, they want resilience.

The music is playing again in Europe. With demand for credit rising and investors diversifying away from the US, we believe we are in a sweet spot.

Spreads on AT1 CoCos have been highly cyclical

Chart 1: Spreads on AT1 CoCos (in bps)

Over the past decade, spreads on Additional Tier 1 (AT1) CoCos have shown pronounced cyclicality, fluctuating from 250 to 750 basis points (bps). While improving fundamentals in the financial sector may support a buy-and-hold strategy to capture carry, this approach overlooks the inherent volatility of CoCo spreads.

We believe active management is essential. Chart 1 illustrates how spreads have moved in cycles, making timing and positioning critical. Our team has invested significant effort in developing quantitative indicators to measure cyclicality and manage extension risk. While precise market timing is impossible, these tools enable us to make informed decisions and avoid pitfalls, such as the April sell-off, when spreads widened sharply.

Our strategy aims to be purely quantitative, data driven and free from emotional bias. These indicators provide us with discipline and clarity. Currently, they signal extreme caution: exposure to CoCos should be minimal.

Quantitative indicator for CoCo allocation

We use extension risk as a key indicator in our AT1 bond strategy, as outlined in our previous article, “Capitalising on extension risk in AT1 Bonds”. This guides our exposure, alongside trigger levels that determine when and how much to add. For example, our CoCo allocation only increased from 13% to 25% because the recent spread widening was not sufficient to justify a larger move. As shown in Chart 1, current spreads have approached levels seen during major events like the Ukraine invasion and Covid, though they have not quite reached those extremes.

This is a case study in disciplined positioning. Our model signalled caution, and we held back. Today, it is telling us to reduce our exposure to CoCos. But that does not mean going to cash, it means rotating into senior credit, where carry remains attractive. Timing is critical: there are better moments to own CoCos, and better moments to own senior debt. While pure CoCo funds may outperform briefly, risks are building. The market is priced to perfection, in our view, and the next six months could be volatile. We remain invested in one of the most attractive areas of credit, but we have to be disciplined. The valuation signals that caution is essential, exactly what central banks have been warning.¹ You need to be very careful.

Case study – high vs low beta AT1 CoCos

Chart 2: High vs low beta AT1 CoCo from Standard Chartered

Chart 2 compares two AT1 CoCos from Standard Chartered over the past four years. Contrary to conventional wisdom, where higher risk is expected to yield higher returns, the lower-beta bond (blue line) delivered stronger performance with less volatility, particularly between 2021 and 2022. This period included the outbreak of Russo-Ukrainian War, during which the lower-beta bond demonstrated greater downside resilience. This highlights the importance of active management in our market.

Our proprietary indicator signalled a preference for the lower-beta CoCo during that time, helping us navigate heightened market stress. From 2022 to 2025, however, the higher-beta CoCo (grey line) became more attractive, ultimately outperforming by 20% over the period. This shift demonstrates how our model adapts to changing market conditions.

April’s CoCo sell-off was a real-time validation of our approach. While others were overexposed, our disciplined, data-driven strategy helped us navigate volatility effectively. Today, we believe we remain well-positioned, capturing compelling yields in subordinated debt while maintaining discipline.

The key takeaway: active management works. Knowing when to rotate between instruments is essential to managing risk with the added aim of enhancing returns.

What lies ahead after UBS took over Credit Suisse?

When UBS acquired Credit Suisse in 2023, many investors declared they would never touch CoCos, or Swiss banks, again. Fast forward to today: UBS just issued USD 2 billion in CoCos, attracting over USD 20 billion in demand²—one of the strongest showings we have ever seen, especially in summer. Clearly, pronouncing CoCos dead was premature. The sector remains fundamentally strong. In times of uncertainty, investors seek quality, and that is exactly what subordinated debt offers: a yield premium backed by solid credit fundamentals. But despite this strength, caution is warranted. Valuations are tight, and everything feels expensive. That is where active management comes in.

Our models tell us this is not the time to take unnecessary risk. It is about ensuring you are properly compensated for the risk you take. Volatility is likely to rise, and we are prepared for that. If markets turn, we believe we are positioned to benefit.

This is the essence of our approach: disciplined, data-driven and focused on risk-adjusted returns. The sector is attractive, but timing and positioning are everything.

Our edge: discipline, experience and early action

We believe Atlanticomnium offers a distinct edge in subordinated debt investing, backed by one of the longest track records in public subordinated financial credit in Europe. Since 1985, we have managed strategies across the capital structures of banks, insurers and corporates, giving us 40 years of insight into European credit markets.³

But it is not just experience that sets us apart, it is the discipline and agility we have applied in recent years. In February 2023, we held just a 15% allocation to CoCos, weeks before the Credit Suisse event. While others hesitated, we were among the few buying discounted CoCos. As the market re-engaged, we took profits and rotated into senior and Tier 2 debt. By March, we were bullish again, prompting investor feedback like “How did you get it so right?”

The answer lies in our process. We act early, guided by data, not emotion. In our view, others may follow, but we have already moved. That timing advantage, combined with our deep understanding of capital structures, gives us our edge. We remain focused on clarity, conviction and consistency.

Gregoire Mivelaz is a Fund Manager at Atlanticomnium, who co-manages credit opportunities and climate bond strategies for GAM Investments