Sohail Malik, a hedge fund manager at ECM Asset Management Ltd., made 13.5 percent shorting Aviva (AV/) Plc stock after correctly betting the firm would cut its dividend. Now he’s looking for returns in the insurer’s bonds.
Malik, 39, who runs London-based ECM’s European Special Situations fund and usually invests in bonds, was monitoring Aviva’s balance sheet before its full-year results and couldn’t see where the cash to fund its dividend was coming from.
“There was a simplistic view from the equity market that the reason why you buy Aviva is because of the high dividend yield,” he said in a telephone interview. “But the numbers didn’t make any sense and with the arrival of a new CEO, there was a feeling he’d want to get the bad news out of the way.”
Aviva shares dropped as much as 16 percent on March 7, when Chief Executive Officer Mark Wilson, who took over at the beginning of the year, cut the insurer’s dividend as he pledged to make the firm more resilient to the European sovereign debt crisis. The efforts by Wilson, who followed London-based RSA Insurance Group Plc (RSA) in cutting dividends, to bolster Aviva’s capital reserves, will lift returns on its bonds, Malik said.
“Aviva has had its troubles, but it has been in deleveraging mode and disposing of non-core assets for some time now,” Malik said. “That helps solvency and makes it a self- healing story. We’ve always been a fan of the company from a credit perspective.”
Malik said he bought London-based Aviva’s 4.7291 percent perpetual bonds in the third quarter of last year when they were yielding about 15 percent. The bonds are now yielding 7.34 percent, according to Bloomberg generic prices, and Malik said he expects the price to rise to par when they’re callable next November.
Malik’s fund returned 9.75 percent last year net of fees, beating the 343-member Eurekahedge European Hedge Fund Index, which returned 6.8 percent in 2012.
ECM, which manages $9.5 billion of assets, set up the European Special Situations fund in November 2010 to take advantage of opportunities presented by the European sovereign debt crisis. Malik, a former trader at Credit Suisse Group AG (CSGN), runs the fund with Amit Staub. He declined to comment on the fund’s assets before its three-year anniversary this year.
Wilson announced he would cut directors’ bonuses to zero for 2012 and will freeze pay next year for 400 top managers after reducing the firm’s second-half dividend 44 percent as the U.K.’s second biggest insurer posted a 3.05 billion-pound ($4.6 billion) net loss related to the sale of its U.S. division last year. Aviva, which has more euro-region investments than any other U.K. competitor, said the asset sales over the last six months reduced the cash flow used to fund its dividend, making the payout unsustainable.
Aviva isn’t the only insurer of interest to Malik. He’s also holding Madrid-based Mapfre SA (MAP)’s 5.921 percent lower Tier 2 bonds after buying them in the third quarter of last year when they were trading below 60 cents on the euro. The bonds rose 0.3 percent to 90.05 cents today.
“We thought the market was under appreciating the strength of the balance sheet and it was just in the wrong neighborhood,” Malik said, referring to the firm’s listing in Spain. “It’s got global presence, plus healthy growth dynamics within Latin America and the U.S. We still like it.”
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