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Mindful Wealth eyes fund re-domicile to Singapore

The boutique wealth and asset manager plans to launch a CLO bond fund and hopes to take advantage of Singapore’s new fund structure, according to Federico Cristina, the firm's investment manager.
Federico Cristina, Mindful Wealth

Singapore-based Mindful Wealth (formerly EOF Services), has both discretionary and advisory wealth management clients. On the asset management side, it runs the Avenida CLO Equity Fund and plans to launch a CLO bond fund in August.

Both are set up in the Bahamas, but the intention is to re-locate both funds to Singapore, where a new fund structure, the Singapore Variable Capital Company (S-VACC), is expected to be in place next year.

“We are strongly considering the relocation of the [CLO funds] under the S-VACC structure,” Cristina said. “Singapore is a well-known and stable financial jurisdiction and much more preferred by investors than other offshore jurisdictions such as Bahamas and Cayman.

“[The S-VACC] will be a possible good structure because Singapore wants to compete with the fund jurisdiction in Europe,” he said. “But we need to wait for the final draft by the regulators to understand if the S-VACC is suitable for our asset class.”

Obscure product

CLOs or collateralised loan obligations, are structured products that invest in senior secured loans.

The firm’s CLO Equity Fund currently has $85m in AUM. About 10% of assets are derived from Mindful’s wealth management clients, Cristina said.

The fund aims to deliver an absolute return over a five-to-seven year investment horizon, which is the average life for a CLO and the recommended lockup for the asset class, he said.

According to Bloomberg data, the fund is up 35% since launch and 3.25% year-to-date.

A CLO bond fund is planned for launch in August in both Asia and Europe, the firm said. Expected yield is 5% (three-month Libor rate plus 270bp). Cristina said the product will be US dollar-denominated and invest in US bonds with an average rating of at least BBB.

Investing in Asian senior loans is difficult because the recovery rate in case of default is low. “Senior loans are loans of sub-investment grade companies, and in Asia these companies are still in the grey area [in terms of transparency]. That’s why we are investing in the US, because after the 2008 crisis the regulations are stricter.”

He admits that investor acceptance of CLOs in Asia is low, and in Singapore, only state-run Temasek is an investor in the asset class.

“It is a very niche market, nobody in Asia really knows much about it. They confuse it with other assets, especially with something related to the crisis of 2008, such as the CMO (collateralised mortgage obligation).”

But he believes demand for the asset class is increasing in the region, particularly from Chinese and Korean investors.

CLOs vs high yield

Cristina said that CLOs have experienced fewer defaults than corporate bonds of the same rating, due to the selection of the underlying bank loans. “There is a manager that is selecting 150-200 names of senior loans and is actively managing them.”

Risk is addressed by managing sector exposure and aggregating exposure to the same credit level of the entire CLO portfolio, according to the firm.

CLO equities have low correlation to equity markets, but the risks are that liquidity is low – a five-to-seven year investment horizon is required – and leverage is high compared to high yield bond funds.

However, according to data from Credit Suisse, for the last 22 years (beginning in 1995), institutional loan defaults have exceeded high yield loan defaults only six times on an annual basis. Moreover, during the same period, the data shows institutional loan recovery rates on average were higher than that of high yield bonds each year.

“There is less possibility for senior loans to default, and even if they do, there is a better recovery rate than high yield loans,” Cristina said.

Part of the Mark Allen Group.