Kapstream Capital, the fixed interest boutique founded by ex-PIMCO boss Kumar Palghat, will commence its first fund this month with a $100 million commitment from its part-owner, Challenger Financial Services Group.

Palghat said the seed funding would be drawn down once an investment management agreement with Challenger was finalised. The fund will be a global, absolute return income fund targeting a return of the cash rate plus 2 per cent, Palghat said. This could be dialled up for wholesale mandates, Palghat said, with one institution already requesting a cash plus four per cent profile. A former PIMCO colleague of Palghat’s from the US, Nick Maroutsos, has emigrated to Australia to be Kapstream’s head of business, while Palghat’s wife, former World Bank economist Kathy Palghat, will be an adviser to the firm. At least two more appointments are imminent. Palghat hoped Kapstream would enhance the reputation of fixed interest as the source of “the highest information ratio alpha you can get”. He pointed to a recent Moodys survey which analysed every investment grade bond issuance, government and corporate, between 1970 and 2005. “The default rate over that entire period was only 8 per cent, and the recovery rate on the defaults was half. Long term, the risk return profile is pretty compelling,”; he said.

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