It’s time for convertible bonds


Global stock markets were put to the test in August, recording their largest monthly dip in over three years amid rising concern over China, uncertainty over Fed’s upcoming interest rate action and the general lack of liquidity in the summer season

If global convertible bonds were not spared by the selloff, the asset class gave however strong evidence of its resilience capacity over equities, in challenging markets environment.

From one market cycle to another, convertible bonds have demonstrated their ability to capture a large part of stock markets’ rise, while significantly alleviating the negative impact of their fall, thanks to their dual profile: an optionality to participate in equities’ uptrend; a bond-floor which acts as a safety cushion when the trend reverses. Over the long run, this has translated for convertible bonds in an enhanced risk-adjusted return profile relative to equities: similar to higher returns, with yet much lower volatility levels.

This is what convertible bonds have been delivering year-to-date, both at local – European – and global levels.
On a year-to-date basis, as at September 15th, the Thomson Reuters Global Convertible Bond index (hedged Euro) is up 1.9%. Over the same period, the MSCI World Daily TR index (Hedged Euro) is down -1.5% – meaning an outperformance of global convertibles over global stocks of 3.4%. What is more, this strong outperformance has been achieved with roughly half global stocks’ volatility: YTD, the annualized volatility of the Thomson Reuters Global CB index is 7%, against 13% for the MSCI World.

In this environment, our global convertible bond strategy – which will pass the 3 year-milestone in November – went one step further: the fund has progressed 4% year-to-date, significantly outperforming both global equities and the global convertible bond universe (as represented by the Thomson Reuters index), with an annualized volatility of 8.5% YTD.
We believe the outlook is favorable for the asset class: despite a slowdown during the summer season, primary activity in the global space remains dynamic and supportive, both in terms of diversification and valuation. Besides, the recent correction has opened-up strong opportunities in terms of pricing. Today, convertibles’ implied volatility level is either slightly below or in line with its historical average level, across the main convertible markets. We believe the combination of these elements makes an attractive entry point into the asset class.

Nicolas Delrue – Investment Specialist Convertible Bonds – Union Bancaire Privée – UBP