Convertible bonds (CBs) are gaining popularity with investors looking for safer alternatives in today’s “uncertain” financial market, according to a senior portfolio manager at NN Investment Partners.
CBs are a type of debt security that can be converted into a “predetermined amount of a company’s equity” at certain times during the bond’s life.
According to the Dutch-based firm, 2018 CB issuance volume has been the highest in the US, around $50bn, and one of the highest globally, around $85bn (£67bn, €75bn), since before the global financial crisis.
Naturally seeking
Ivan Nikolov, senior portfolio manager of convertible bond strategies at NN Investment Partners, told International Adviser: “Against increasing interest rates, market volatility and geo-political uncertainty, many investors are naturally seeking safer alternatives for their assets.
“One asset class which has successfully weathered multiple market cycles and which has been gaining in popularity is convertible bonds.
“Their embedded equity call options allow investors to profit when the market is rising, while their coupons and fixed redemptions provide a floor should negative outcomes materialise.
“CBs also exhibit a negative correlation to government bonds and therefore tend to decrease a portfolio’s interest rate risk.”
Opportunities
Nikolov added: “For investors, the recent surge in CB issuance provides a wide range of opportunities within the market, especially in companies which have no other investable debt that could diversify credit exposure.
“With volatile but rising stock markets, CBs could be a risk-efficient way to retain equity exposure.
“There is one caveat, however: the CB bond part would only protect investors and dampen volatility as long as it holds onto its own perceived credit value.
“Rigorous credit analysis performed by an active manager is of utmost importance for investors seeking adequate protection for their capital, especially given that most CBs are not rated by the main credit rating agencies.
“With asymmetrical returns and low interest rate risk, convertible bonds are an excellent opportunity for investors to remain invested in economic growth while navigating the market storms.”
