Philippe Sissener and his team at Sissener AS have successfully managed a high-yield UCITS fund for over five years. Seeing the additional potential for enhanced returns, the team has launched a strategy within a more flexible Luxembourg Reserved Alternative Investment Fund (RAIF) structure, offering greater freedom to maneuver. With a monthly subscription and quarterly redemption cycle instead of daily, no restrictions on exposure to individual issuers, and a wider range of allowed credit investments, Sissener Credit Opportunities – guided by Lead Portfolio Manager Mikael Gjerding – aims to provide a higher-return alternative to the already successful Sissener Corporate Bond Fund.

Breaking Free of the “5/10/40” Rule

“With the rapid growth of our UCITS fund, we are finding that our flexibility to maneuver is increasingly constrained by UCITS regulations,” says Philippe Sissener, lead Portfolio Manager of Sissener Corporate Bond Fund. “These rules prevent us from doing everything we can to achieve the highest possible returns,” he emphasizes. The “5/10/40” rule under the UCITS structure mandates that no single asset can account for more than 10 percent of a fund’s assets and holdings of more than 5 percent cannot collectively exceed 40 percent of the total assets. “We see clear advantages for both our investors and our strategy in having the ability to exceed the 5/10/40 rule.” 

“With the rapid growth of our UCITS fund, we are finding that our flexibility to maneuver is increasingly constrained by UCITS regulations.”

Philippe Sissener

Concentration is integral to the Sissener Corporate Bond Fund’s strategy, and the newly launched RAIF-structured fund amplifies this focus even further. “While many of our UCITS peers hold 100 to 200 positions, we already have a more concentrated portfolio of 30 to 40 core positions,” explains Sissener. “With Sissener Credit Opportunities, we maintain an even more concentrated portfolio of 10 to 20 core positions,” he adds. By maintaining a focused portfolio, the team can allocate more heavily to their highest-conviction ideas and devote greater time to in-depth research and continuous monitoring of each investment.

“In our UCITS fund, there are some names we would like to own more as a percentage of the fund, but we are capped at 10 percent of the issuer’s outstanding debt and legally constrained from adding more under UCITS rules,” says Sissener. “In some situations, it is great to have the opportunity to exceed this threshold of 10 percent in order to obtain negative or even positive control.” 

Expanding the Investment Universe

The RAIF structure of Sissener Credit Opportunities also unlocks access to a much wider range of investment opportunities. “While the UCITS fund is restricted to publicly listed bonds, the new fund can explore all types of credit, including secondary bank loans and direct lending alongside publicly listed bonds. We have the freedom to pursue any type of credit,” says Philippe Sissener. Although the fund may not always be invested in direct loans or distressed loans, Mikael Gjerding highlights, “it’s not guaranteed that we’ll utilize every option, but having the flexibility to invest across the entire credit spectrum is very important. This flexibility is key and the multitude of opportunities that come with the flexibility.”

“It’s not guaranteed that we’ll utilize every option, but having the flexibility to invest across the entire credit spectrum is very important. This flexibility is key and the multitude of opportunities that come with the flexibility.”

Mikael Gjerding

This structure allows the Sissener team “to take a more significant portion in smaller loans, enabling us to structure deals favorably in a market where standard bonds often have weak covenants and low spreads,” Gjerding explains. “For example, when we’re providing 25 percent of an issuer’s credit, we gain a stronger negotiating position to shape terms that better suit us than the issuer – an obvious advantage,” he elaborates. “Currently, UCITS funds are at the mercy of issuers dictating terms, a symptom of the excess capital in the market.” This flexible setup grants Sissener Credit Opportunities the agility to adjust as needed.

Market-Aligned Subscription and Redemption

Unlike the daily-traded UCITS Sissener Corporate Bond Fund and most of its peers, Sissener Credit Opportunities operates with a monthly subscription cycle and a three-month redemption notice, better aligning with the inherent illiquidity of the Nordic high-yield market. “Managing a large fund with daily liquidity requires us to stick to the most liquid part of the universe,” Sissener explains. “Daily liquidity also means we must maintain a cash reserve, typically around five percent, which slightly reduces the fund’s return potential,” he elaborates. “Additionally, we hold a substantial portion of our fund in shorter-dated, lower-yielding bonds to act as a liquidity buffer if and when needed.”

Transitioning from daily to monthly liquidity and a three-month notice requirement is “a major advantage, first and foremost for our investors, as it allows us to adopt a different approach and concentrate risk without the pressure of daily liquidity requirements,” emphasizes Sissener. The three-month redemption notice also gives the team a significant lead time, offering ample opportunity to prepare the necessary liquidity in the event of redemptions.

“A major advantage, first and foremost for our investors, as it allows us to adopt a different approach and concentrate risk without the pressure of daily liquidity requirements.”

Philippe Sissener

Freed from the constraints of the “5/10/40” rule and with greater flexibility in managing investment liquidity, Gjerding sees these structural advantages as “creating the potential for 200 to 250 basis points in excess returns in today’s market with compressed spreads.” He adds, “Naturally, if spreads were to widen in the broader market, this differential would also expand.” This added return is partly attributed to “the illiquidity premium we believe we can provide to investors comfortable with a three-month capital commitment rather than daily liquidity.”

Same Philosophy, Different Structure

In managing the Sissener Corporate Bond Fund, Philippe Sissener follows a conservative and cautious investment approach, drawing on the philosophy of Howard Marks at Oaktree, who famously said, “If we avoid the losers, the winners take care of themselves.” The new fund’s investment strategy, according to lead portfolio manager Mikael Gjerding, “is not very different from what we have in the Corporate Bond Fund.” He explains, “All investments in both funds focus on situations with strong debt-servicing ability – that focus is central to our investment process and DNA.” Gjerding notes, “It’s the same team, the same underlying philosophy. The difference lies in the legal structure of the new fund, which offers us much more flexibility in our investments.”

The team’s security selection and analysis process “involves actively engaging with companies, meeting their management teams, and dedicating substantial time to understanding them,” explains Sissener. “We focus on investing in companies we have followed for a long time. This approach is only feasible when you maintain a limited number of core positions – 30 to 40 in our daily UCITS fund,” he adds. “It becomes even more effective with a concentrated portfolio of 10 to 20 core positions in our Credit Opportunities Fund.”

Sissener Credit Opportunities currently exhibits a yield-to-maturity of 10.3 percent, compared to 8.2 percent in the daily-traded Sissener Corporate Bond Fund. “This structure is well-suited for today’s tight spread environment, as it allows us to concentrate more heavily on our highest-conviction ideas,” Gjerding explains. “However, the structure can be even more advantageous in a market with wider spreads and more distressed opportunities,” he emphasizes. “This is a permanent, evergreen structure, offering benefits in any market environment. The flexibility to explore virtually any area of the credit space is a key advantage.”