Greg Branch, cio at SCIO Capital, answers SCI's questions

Q: How and when did SCIO Capital become involved in the structured finance market?
A: SCIO Capital was incorporated in London in October 2009. The name was chosen as both an acronym for Structured Credit Investment Opportunity and its meaning in Latin, "I know and understand". SCIO's objective was then to fill a gap in the European structured credit market for a fund advisor focused on credit fundamentals.

We observed then (and it remains the case today) that many investors rely for credit analysis and investment decisions on public ratings and a successful syndicate process. History has shown that investors tend to follow each other's decisions in a 'herd mentality', even at times to their detriment.

European structured credit assets demonstrate key credit differences from each other and following investments based only on buying trends and ratings in structured credit may unwittingly present risks to investors. SCIO's investment process recognises differences in investments, focuses on each transaction's credit fundamentals and relies on its own proprietary analysis in each investment.

Q: What, in your opinion, has been the most significant development in the credit market in recent years?
A: The most significant recent development in credit markets was the introduction of TARP and TALF in the US. A comparison of evolution of US and European structured credit spreads shows that US spreads tightened significantly once those programmes were implemented. Comparable European spreads ground slowly tighter over a similar period and still remain significantly wider than pre-crisis levels.

Q: How has this affected your business?
A: The European structured credit market has remained deeply dislocated and prices discounted. SCIO has managed to achieve a significant windfall return for its investors and, given the continuing conditions, should continue to do so for the foreseeable future.

Q: What are your key areas of focus today?
A: SCIO's focus is on structured credit and will continue to be so in the years to come. SCIO will maximise returns from exploring credit opportunities for so long as these remain in place. Additionally, SCIO will leverage off the significant structured credit experience of its team to build itself into an asset manager for all medium- to long-term institutional investments into primary and secondary European structured credit.

Q: What is your strategy going forward?
A: All successful organisations provide superior customer service to their clients. For a fund management business, that means generating exceptional returns on invested capital with the lowest quantum of risk, providing timely and pertinent reporting, and alignment of interest between the managers and the investors. To date this customer-oriented strategy has paid off, with SCIO having recently opened its fourth fund, and we will continue to build the business with this objective as our primary focus.

Q: Which major development do you need/expect from the market in the future?
A: Looking ahead, we anticipate further price volatility in the structured credit market in 2011 arising from the changing regulatory landscape (Basel 3, CRD 2 and Solvency 2), credit concerns with peripheral Euro sovereigns, changes in rating agency methodology and continued sell-side pressures from European banks related to legacy holdings.

In spite of this volatility, however, we project price appreciation in most European structured credit sectors to continue throughout 2011. Owing to limited new issue supply coupled with increasing investor demand, we envision most European structured credit sectors continuing to outperform alternative investments by a wide margin on a risk-adjusted basis for the remainder of the year.