Convertible Bonds: opportunity knocks

25/10/2018

If we look past negative headlines regarding tariffs and trade wars, the world is currently seeing healthy economic growth and upward pressure on interest rates due to the phasing out of monetary stimulus. Such an environment presents a buying opportunity for Convertible Bonds (CBs). CBs’ equity-like characteristics mean they benefit from economic growth while they are only modestly impacted by rising rates because of their low duration, which averages 1.8 years across the asset class.

Analysis* shows that the CB asset class has outperformed equities over the last 20 years with 35% lower volatility, highlighting the potential added value of CBs to investor portfolios. CBs can also be a powerful diversifier within portfolios, due to their high correlation to equities, but limited correlation to high yield bonds and even negative correlation with government bonds. The analysis shows that CBs have displayed an 85% correlation with equities over the last 20 years but lower figures of 71% and 39% with high yield and investment grade bonds respectively. They showed a negative correlation of -11% with government bonds.

Jasper van Ingen, Senior Portfolio Manager Convertible Bonds at NN Investment Partners explains: “Equities’ and CBs’ outperformance of fixed income in a rising rate environment is a fairly consistent pattern dating back to the 1980s. In times of rising rates, equities have historically performed well as interest rates have risen to counter economic overheating, thereby boosting CB returns. At the same time, CBs are less affected by rising rates than non-convertible bonds due to their lower duration. Rising rates also provide a strong incentive for companies to issue CBs as the coupon rebate that issuers receive becomes more material. This also gives more choice to investors. As such the strong positive momentum in global CB issuance in 2018, the highest since 2007, is no surprise.”

At NN Investment Partners, the convertible bond investment team uses a theme-based framework to identify attractive medium-term investment opportunities. At present, Van Ingen sees several key themes offering outstanding potential in the CB market, including Electronic Components, Healthcare Spending and Cloud Computing. He believes these themes will benefit from an increasing demand for electronic devices with ever more components to increase their functionality, for healthcare-related services to cater for the increasing population that is capable of affording such services, and for cloud data storage.

“We are closely following a number of events and possible risks in the coming months, including a potential further escalation of the trade war, a resurgence of geopolitical tensions and the US midterm elections in November. As such, it is important to construct a portfolio that can weather market disruptions by selecting CBs with strong credit fundamentals.”

* Source: Bloomberg, NN IP analysis 20 years to 31 July 2018, Thomson Reuters Global Convertible Bond Index, MSCI World, BoAML Global Broad Market Corporate Index, BoAML Global Government Bonds Index, all in USD, hedged after 10/2002

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Disclaimer

This communication is intended for press use only. This communication has been prepared solely for the purpose of information and does not constitute an offer, in particular a prospectus or any invitation to treat, buy or sell any security or to participate in any trading strategy or the provision of investment services. While particular attention has been paid to the contents of this communication, no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof. Any information given in this communication may be subject to change or update without notice. Neither NN Investment Partners B.V., NN Investment Partners Holdings N.V. nor any other company or unit belonging to the NN Group, nor any of its directors or employees can be held directly or indirectly liable or responsible with respect to this communication. Investment sustains risk. Please note that the value of any investment may rise or fall and that past performance is not indicative of future results and should in no event be deemed as such. This communication is not directed at and must not be acted upon by US Persons as defined in Rule 902 of Regulation S of the United States Securities Act of 1933, and is not intended and may not be used to solicit sales of investments or subscription of securities in countries where this is prohibited by the relevant authorities or legislation. Any claims arising out of or in connection with the terms and conditions of this disclaimer are governed by Dutch law.

About the author

Jasper van Ingen

Jasper van Ingen

Senior Portfolio Manager

Experience since 2002

Business Experience

2014-to date Senior Portfolio Manager Convertible Bond
Jasper is Senior Portfolio Manager Convertible Bond Strategies at NN Investment Partners

2013-2014 Partner/Senior Portfolio Manager, Avoca Convertible Bond Partners LLP, London

2011-2013 Senior Portfolio Manager Convertible Bond Strategies, Avoca Capital, London

2010-2011 Partner, Project 8IM, London

2008-2010 Senior Portfolio Manager, Corporate Opportunity Strategies, APG Asset management, Amsterdam

2004-2007 Portfolio Manager, Corporate Opportunity Strategies, APG Asset management, Amsterdam

2003-2004 Portfolio Manager, Hedge Fund Strategies, ABP Investments, New York

2002-2003 Portfolio Manager, Hedge Fund Strategies, ABP Investments, Amsterdam

Qualifications
MSc, Finance, University of Amsterdam, 2001

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