investment viewpoints

Using convertible bonds to navigate an uncertain horizon

Using convertible bonds to navigate an uncertain horizon
Maxime Perrin - Head of Sustainable Investment

Maxime Perrin

Head of Sustainable Investment

Investment update by Maxime Perrin, Senior Analyst and Client Portfolio Manager, 19 December 2018

For professional investor use only

A shift in market conditions is underway, fuelled in part by fears of a global trade war and the ongoing normalisation of monetary policy. The convex nature of convertible bonds makes them well suited for this environment, in our view.

There are growing concerns worldwide regarding inflation, asset valuations, central bank decisions and the impact of rising trade protectionism. Against this backdrop, we expect risk-conscious investment approaches to become increasingly attractive to investors.

A new Investment Viewpoint from LOIM’s Convertible Bond team outlines the case for convertible bonds in the current environment. 

“Convertible bonds offer investors an asymmetric risk and return profile as they combine the characteristics of a corporate bond and the option to convert that bond into shares,” writes Product Specialist Maxime Perrin.

“The convex nature of these instruments enables them to offer equity-like returns but with much lower volatility and reduced drawdowns, over the long term.”

Since convertible bonds can be exchanged for equity, they offer investors the potential to participate in the upside of equities. Over the second half of 2018, we expect equity markets to rise, albeit amid greater volatility, meaning that convertible bonds could stand to benefit.

However, if the underlying equity fails to increase in value, the convertible bond maintains the investment value of the bond. Investors might expect convertible bonds to suffer when interest rates are on the rise, given their fixed income nature, yet the asset class has outperformed traditional bonds during such periods in the past.

In every period where the 10-year bund yield has increased by 120bps or more, European convertible bonds have generated positive returns, while in the US there have been 11 periods when the 10-year yield has risen by 100bps or more over the past 25 years, and during every one of these periods, convertibles outperformed bonds. 1

Periods of heightened uncertainty call for a more risk-conscious approach. We believe convertible bonds can provide investors with an effective means of planning for what lies ahead.

Past performance is not a guarantee of future results.

1 Source: Bloomberg, Barclays and BoAML. For illustrative purposes only. 

important information.

For professional investor use only.
This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
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