investment viewpoints
Convertible Bond Asia celebrates 10 years
Head of Sustainable Investment
Launched in December 2008, the LO Funds–Convertible Bond Asia fund has succeeded in delivering to its investors the promised asymmetrical returns, capturing more of the equity upswings than participating in the downturns.
In a decade which encompasses the end of the great recession, quantitative easing, a great equity bull market and the rising risks of the current economic environment, the fund has delivered on what it set out to do. The aim is to provide investors low volatility exposure to the Asia-Pacific equity markets and outperformance of regional equities, on a risk-adjusted basis. Looking forward, we expect some clouds to clear in Asia, although the macroeconomic backdrop will remain challenging. In our view, Asian convertible bonds provide a very useful tool for investors to navigate the coming uncertain market environment. Client Portfolio Manager Maxime Perrin outlines the case investing in the Asia-Pacific region in the current climate, while cautioning investors against the associated risks. He also looks at why investors consider the use of Asian convertible bonds to gain exposure to the region.
Why the Asia-Pacific region?
- There are clear signs that economic growth in the region will be supported by fiscal and monetary measures in 2019, particularly in China.
- Chinese policy makers are recognising the downside risks to growth and are easing along multiples axes. Fiscal policy is moving towards stimulus regarding infrastructure investment, lower bank RRR (reserve ratio requirements) and other measures to improve liquidity. President Xi signaled support to private-owned enterprises that included tax and fees reduction and access to financing measures.1
- In the broader region, most Asian authorities have maintained a favorable policy mix, which should enable these economies to maintain stable growth. Moreover, we believe Asian central banks are likely to continue to allow currencies to adjust in response to US rate rises.
- There is likely to be less pressure from the US dollar going forward.
- The decline in oil prices eases headwinds and softens inflation for many emerging Asian economies.
2. Valuations are attractive after a sharp correction in both equities and credit.
- Asian equities in 2018 had their sixth worst year since the 1980s. Our analysis of historical trends point to a likely rebound in 2019.
- Credit spreads have widened substantially. Corporate yields levels are close to 10-year highs.
3. There remains, however, substantial risks associated with emerging-market exposure.
- Three macro drivers, in our view, will continue to challenge the more bullish views on Asia in 2019. These are:
i. Slowdown in global economic growth. This is aggravated with further monetary tightening, notably from the Fed.
ii. Trade war fears. China and the US have agreed on three months of negotiations ending on 31 March 2019. The threats of tariffs and counter-tariffs is expected to continue. Investors can thus expect higher volatility until a clear compromise is found.
iii. Domestic issues in China. We see some particular threats, including the growth and excessive level of overall credit, as well as consumer sentiment and the relationship between state-owned enterprises and the private sector.
Why use convertible bonds to gain exposure to the region?
1. Asian convertible bonds are appealing for a defensive-minded approach to the region in the current market climate.
- Asian convertibles offer potential opportunities on both sides of the investment spectrum: credit and equity markets.
- Asian convertible bonds can offer good defense against downturns through its bond component and low equity risk through its poorly valued optionality – yet allow meaningful participation in the event of an upside.
- Asian convertible bonds appear technically cheap if one expects equity volatility to rise. A higher volatility environment benefits the asset class, as it strengthens the option value of these instruments
- In 2018, convertible bonds from the Asia-Pacific region reflected only 30% of the downside of the region’s equities (-3.7% for LO Fund–Convertible Bond Asia versus -12.7% for the MSCI Asia ex-Japan index, both USD-hedged1).
2. Historically, convertible bonds from the Asia-Pacific region have a track record proving its capacity to deliver low-volatility exposure to regional equity markets.
- The 10-year track record of our own LO Funds–Convertible Bond Asia fund has a high level of volatility-adjusted performance. It has a Sharpe Ratio of 1.04 versus 0.61 for the MSCI Asia ex-Japan.2
1 Source: Bloomberg, October 2018.
2 Source: LOIM, Bloomberg. Past performance is not a guarantee of future results.
important information.
IMPORTANT INFORMATION
Lombard Odier Funds (hereinafter the “Fund”) is a Luxembourg investment company with variable capital (SICAV). The Fund is authorised and regulated by the Luxembourg Supervisory Authority of the Financial Sector (CSSF) as an Undertaking for Collective Investments in Transferable Securities UCITS under Part I of the Luxembourg law of the 17 December 2010 implementing the European directive 2009/65/EC, as amended (“UCITS Directive”). The Management Company of the Fund is Lombard Odier Funds (Europe) S.A. (hereinafter the “Management Company”), a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, Grand Duchy of Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended. This marketing document relates to “Convertible Bond Asia”, a Sub-Fund of Lombard Odier Funds (hereinafter the “Sub-Fund”). This marketing communication was prepared by Lombard Odier Asset Management (Europe) Limited.
The prospectus, the articles of incorporation, the Key Investor Information Documents, the subscription form and the most recent annual and semi-annual reports are the only official offering documents of the Sub-Fund’s shares (the “Offering Documents”). The Offering Documents are available in English, French, German and Italian at www.loim.com and can be requested free of charge at the registered office of the Sub-Fund in Luxembourg: 291 route d’Arlon, 1150 Luxembourg, Grand Duchy of Luxembourg. The information contained in this marketing communication does not take into account any individual’s specific circumstances, objectives or needs and does not constitute research or that any investment strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal investment advice to any investor. This marketing communication is not intended to substitute any professional advice on investment in financial products. Before making an investment in the Sub-Fund, an investor should read the entire Offering Documents, and in particular the risk factors pertaining to an investment in the Sub-Fund. We would like to draw the investor’s attention toward the long-term nature of delivering returns across the economic cycle and the use of financial derivative instruments as part of the investment strategy may result in a higher level of leverage and increase the overall risk exposure of the Sub-Fund and the volatility of its Net Asset Value. Investors should take care to assess the suitability of such investment to his/her particular risk profile and circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. There can be no assurance that the Sub-Fund’s investment objective will be achieved or that there will be a return on capital. Past performance is not a reliable indicator of future results. Where the Sub-Fund is denominated in a currency other than an investor’s base currency, changes in the rate of exchange may have an adverse effect on price and income. Please take note of the risk factors. Any benchmarks/indices cited herein are provided for information purposes only. No benchmark/ index is directly comparable to the investment objectives, strategy or universe of a Sub-Fund. The performance of a benchmark shall not be indicative of past or future performance of any Sub-Fund. It should not be assumed that the relevant Sub-Fund will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between such Sub-Fund’s returns and any index returns. Target performance/risk represents a portfolio construction goal. It does not represent past performance/risk and may not be representative of actual future performance/ risk. The information and analysis contained herein are based on sources considered to be reliable. Lombard Odier makes its best efforts to ensure the timeliness, accuracy, and completeness of the information contained in this marketing communication.
Nevertheless, all information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice. Source of the figures: Unless otherwise stated, figures are prepared by Lombard Odier Asset Management (Europe) Limited. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice and it is up to each investor to consult with its own tax advisors.
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