Gaining exposure to growth and innovation through convertible bonds

Funding innovation and growth

One feature of the convertible bond universe has been consistently high levels of issuance from companies that are known for financing innovation. Many companies acting as disruptors in their fields have financed themselves using convertible borrowing, giving investors compelling access to growth potential via the long-term equity option that is embedded in a convertible bond.

These companies tend to fund the early stages of their development through convertible bond issuance, representing real opportunities to tap into a range of profitable growth companies for every business cycle. At the same time, convertible issuers can use the proceeds of their convertible issuance to support growth such as business development or M&A, rather than to, say, refinance debt.

Read more: With multiple sources of return, convertible bonds are well-suited for uncertainty in today’s markets

Tapping into multiple sources of growth

Growth can come from many areas. The late 1990s brought the technology, media and telecoms boom, and financing via convertibles seeded the beginnings of the current biotechnology industry. 

Today, potential growth stems more from the themes of:

• Electrification 
• Artificial intelligence (AI)
• Increased defence and infrastructure spending 
• Strong consumer spending. 

It also includes companies aligned to current government policies, which could benefit from current geopolitical dynamics, as shown in Figure 1. 

FIG 1. Convertible bonds: high conviction themes dominate the equity sensitivity of the asset class¹

From growth company to household name

Year after year, some of these growth stocks have generated outstanding returns for the asset class and become household names, including Tesla and Etsy in 2020, and MicroStrategy in 2024². Cumulatively growth companies have been the most significant contributors to performance for the asset class since 2015.

If history is a guide, some of the growth companies issuing convertible bonds today could become the future large caps of the main global equity benchmarks.

Investment themes in Asia driving growth

Giving exposure to AI and to consumer spending on brands and experience, Asian convertible bonds represent strong potential.

For instance, semiconductors are key enablers for AI and the race to gain an edge is driving a sustained capex cycle. This trend should not only drive more growth for key semiconductor companies but also facilitate a longer-term trend for growth. 

In parallel, original design manufacturers (ODMs) could also benefit from the AI theme and a greater volume of AI server shipments. While it may not be complicated to put the components together and build an AI server, it does require expertise and a learning curve to build scale effectively. 

In China, brands and experiences are key for consumers. Alibaba², for instance, is well positioned as a pioneer in ecommerce and fintech, as well as being an early investor in AI. Elsewhere, online entertainment service providers are also increasing market share. Strong Chinese brands are increasingly emerging, with a number of names in different sectors such as sportswear and jewellery.

Read more: Convertible bonds: duality allows for contrarian convictions

Why LOIM?

With a continuous commitment to the asset class for over 30 years, our global team is highly experienced and dedicated to convertible bonds. Members of our investment team have, on average, 21 years of experience in convertible bonds and 12 years at LOIM.³

Using a high-conviction, benchmark agnostic approach, we focus on maximising risk-adjusted returns over a market cycle by providing downside protection and avoiding drawdowns. Our investment process is robust, scalable and includes sustainability criteria. In selected investment strategies, LOIM can support investors in mitigating risks and capturing opportunities associated with the transition to a more sustainable economy.