The defining quality of convertible bonds – combining equity upside potential with fixed-income characteristics – offers a unique opportunity for investors to adopt a contrarian approach. When markets become overly optimistic, convertible bonds allow investors to participate in potential gains but also benefit from downside protection. As a consequence, the asset class can offer a more balanced risk-reward profile than an equity exposure, particularly when positioning in a volatile name.

Our high-conviction strategy benefits from the deep and diverse investment expertise on our desk, enabling us to act swiftly to capitalise on market inefficiencies to make contrarian moves. For example, when a position experiences a significant decline, our team is prepared to invest in line with our convictions while others may sell due to widening credit spreads. 

This approach can be profitable from both thematic and regional standpoints. Recent examples include:

• Investing in sectors such as utilities or real estate, which have been overlooked but are likely to benefit from falling interest rates and long-term trends like generative artificial intelligence, electrification and the climate transition 
• Adding to holdings in small- or mid-cap companies, which are broadly represented in the convertibles universe, rather than mega-caps 
• While many funds are heavily exposed to the US, a contrarian exposure to China – which is now benefitting from long-awaited stimulus – has also been a profitable strategy¹

By harnessing the characteristic duality of convertible bonds, contrarian investors can use the asset class to exercise their convictions.