Partner Insight: "Convertibles as an asset class offer significant diversification"

Partner Insight: "Convertibles as an asset class offer significant diversification"

What is your investment philosophy?

Our investment philosophy is to give investors a strong level of risk-adjusted returns and exposure to capital markets in a diversified fashion by investing in convertible bonds.

We feel that the asset class is an ideal investment vehicle for investors who want stable long-term exposure to markets while retaining a low level of volatility. Given that convertible bonds inherently offer these characteristics, our focus is to provide investors with a vehicle which invests in convertible bonds which offer upside capture to downside protection ratio.

We do not hold any other instruments such as equities, bonds, structured products or CDSs for example and hence focus on the attractive nature of the asset class and simplicity is at the core of our philosophy.

Why have you focused on convertible bonds?

Convertible bonds from an investor's perspective are an exciting asset class given that product can really change during its tenure.

As an example, a convertible gives the investor the ability to receive shares as opposed to a bond at maturity. Hence if the underlying company does well the value of the convertible can appreciate substantially as there is no technical limit to the upside of the stock price. However, if the stock does not perform well the investor has the right to receive their money back as the convertible is a bond from a legal perspective.

Given this dynamic when analysing convertible bonds, each individual security can either be more equity like or bond like or it can behave as a mixture of both, i.e. in the balanced range, making the analysis of each individual convertible intellectually stimulating and never stagnant.

How do you see the market playing out in the coming years?

Convertibles perform well over a full business cycle and well over multiple cycles, as the benefit of asset class is seen when both the capital preservation aspects and participation aspects are combined, similar to why having a diversified portfolio should outperform a single asset class in the long term.

Convertibles as an asset class offer significant diversification as they combine the exposures of equities, bonds and optionality in one product, and hence as markets are more volatile, the value of the asset class is enhanced.

As we look forward, we feel that at some point the business cycle may turn and markets could start to experience more volatility. We have had a significant period of market appreciation; economic data and political instability over the next 10 years are likely to provide an environment which could be substantially different than the last 10 years, creating a strong case for a diversified product positively exposed to volatility such as the convertible asset class.

No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.