Convertible bond fund managers are united in seeing market opportunities, though divided on when they have enough assets to pursue them.
According to brokers, issues have more than 200 takers, compared to about 50 historically. “In the market, you want investors who will not immediately short the equity, and who are in [the market] for the long term,” Carrell says.
Fewer speculators might have increased capacity for products now, while decreasing crowding in trades. Dobbs says: “You could see, by the new issue calendar, the crowding out in the mid- to late-2000s. The calendar became increasingly exotic, suggesting people were pushing the frontiers a little.”
Caution
One manager says investors today want the asset class for conservative exposure to equities – which convertibles offer. He said: “There are currently a lot of concerns about bond markets, and although equities are, in certain markets, very interesting, with the macro uncertainty surrounding Greece and inflation, investors may not want to take full Delta 1 exposure [to equities].”
Before the crunch, adds Mannix, many investors did not consider convertibles a separate asset class, “but the stress of 2008 and 2009 has highlighted how long-only convertibles could be used”.
Dobbs says adding them to a diversified portfolio can bring higher returns for less risk. “In an increasingly bimodal trading environment – where you are likely to get volatility on the upside and downside – convertibles as a long-only product operate very well. On the upside you get the out-of-the-money call option, and compared to stock market products, there is more protection on the downside with convertible bonds.”
According to Eijking, having a diversified convertibles portfolio allows “the gradual and smooth locking-in of profit on convertibles that benefited from strong equity returns, and reinvesting back in convertibles that once again offer opportunity to participate in rising share prices with reduced risk profile. In the long run, convertibles outperform equities while standard deviations are only half. Compared to credits, one generally receives half the coupon on convertibles. If convertibles mature out of the money, you have an opportunity loss of half the coupon, however, unlimited upside potential with the underlying share price.”
