NN Investment Partner’s (NN IP) NN (L) Global Convertible Opportunities fund (GCO) surpassed the $ 1 billion mark last month. This milestone underlines that investors increasingly use convertible bonds (CBs) as a vehicle of choice at a time when global central banks are looking to reduce their stimulus measures. Going forward, rising rates may also give CB issuance a boost as corporates tap this market to continue to finance themselves at attractive rates.
Market uncertainty concerning the path of central banks’ reduction of stimulus measures, geopolitical tensions, and fully valued equities are encouraging investors to look for ways to stay invested in financial markets without the risk of a significant drawdown. CBs typically have low durations, and are designed to gain more from gains in their underlying equity than they stand to lose from losses in the underlying equity of similar magnitude, a measure called positive convexity.
A wide spectrum of investors are becoming increasingly aware of the value-added effect of positive convexity may have for their portfolios: from insurance companies to pension funds and from private banks to family offices.
More and more investors are taking a renewed look at the asset class as a tool to navigate through uncertainty, attracted by the positive convexity features of the product. Also, rising rates and steepening curves provide fertile ground for CB issuance going forward. Rising yields present a strong incentive for corporations to issue convertible bonds that typically pay lower coupons. More issuance means more to choose from for CB investors which is a good thing.
The GCO fund has outperformed its benchmark Thomson Reuters Global Focus benchmark by more than 2 percent per annum since its inception in April 2012. The GCO selectively invests in balanced CBs using an easy to understand four step process focussing on investing in 1) balanced CBs with 2) solid credit metrics and 3) clear thematic drivers to support the investment case for the underlying equities. The fourth step of the process entails a clear matrix to size the investments in the fund. The fund invests in themes that have a limited degree of correlation, ranging from Infrastructure Spending to Changing Diets and Consumption to Cloud Computing.
We are grateful to our investors and to everyone at NN IP around the world, who has supported us in achieving the milestone. We look forward to continue to show the merits of investing in CBs in general, and of our differentiated, conviction-based approach more specifically.
Jasper van Ingen, senior portfolio manager, Convertible Bonds at NN Investment Partners