Q. What makes convertible bonds attractive for investors today?
A. Our outlook for global convertibles in 2025 is constructive, especially for a balanced fund with an investment-grade rating in the prevailing economic environment. Convertible bonds act as a bridge between bonds and equities, enabling investors to weather periods of uncertainty without concern for market timing. Essentially, investors are paid through yield to be exposed to the stock market through the equity optionality, and benefit from added downside protection from the bond element of the instrument.
This exposure reduces the need for perfect market timing: holding a convertible means automatically owning both bonds and equities. This can relieve the stress of reallocating in markets where conditions change rapidly and often. Indeed, volatility has been the main performance driver for convertibles during the recent turbulence.
Supply conditions are also supportive after strong issuance. The convertible universe net-expanded last year after USD 200 billion of deals over 2023 and 2024 and a further USD 40 bn in 2025. We estimate the size of the convertible bond market to be around USD 400 bn currently1. This provides a deep pool of diverse investment opportunities.
we explored these themes in a recent webinar. click here to watch the replay.
convertible bond webinar
Q. Why does convexity, or an asymmetric return profile, benefit investors?
A. We like to say ‘Convexity is back’. Convexity means that investors typically capture more of the upside and less of the downside in the equity market, offering asymmetric participation in moves. Over 20 years, our flagship Global Convertible Bond strategy has captured 50% of the performance of the MSCI World with only a third of its volatility2. Figure 1 uses a ‘capture ratio’ to illustrate how convexity works: it shows how much upside convertible bonds as an asset class captured relative to downside with the underlying stock, on average, over the last 6-month window.
Fig 1. The return of asymmetry: equity upside/downside capture ratio over 6-months3
The high level of convexity in convertibles is due to valuations improving. Also, the overall credit quality of the universe is better than for some time with a lower proportion of unprofitable growth names, providing robust downside protection.
Q. What are the diversification benefits of convertible bonds?
A. The basket of shares underlying the convertible universe differs from the composition of the major equity indices. Convertibles are a truly global product and are well positioned to offer equity investors broader performance outside of the ‘Magnificent Seven’ in the US with greater exposure to Asia, Utilities and Consumer Discretionary and less to Financials. Fixed income investors also benefit from greater exposure to Asia, Technology and Utilities with fewer Energy names. In addition, approximately 50% of convertible issuers have no other tradeable debt.
Read more: An asset class for all seasons: 20 years of investing in convertible bonds
Q. How do convertibles give investors exposure to innovation?
A. Companies focused on growth with an innovation bias tend to issue convertibles to fund the early stages of their development. Cumulatively, growth stocks have been the most significant contributors to performance for the asset class since 20154. Many convertible innovators have subsequently become household names.
In the late 1990s, many Technology, Media and Telecom names issued convertibles. Today, growth is aligned to the themes of electrification, artificial intelligence, increased defence and infrastructure spending, for example. It also includes companies with businesses aligned to government policy across regions.
our expertise.
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learn more Q. Where do you see the best openings in 2025 for the asset class?
A. Asian convertible bonds offer strong prospects, in our view, providing participation in the ongoing economic recovery in China with limited credit downside. Risky assets will remain volatile in the region but this can also be an opportunity: the Chinese economy has strengthened over the last few months and inexpensive equity valuations add to the opportunity set. Chinese companies now occupy more of the convertibles universe following a record year of issuance by, for example, Alibaba, Tencent and the region’s so-called ‘Terrific Ten’5. Asian convertibles have outperformed local equities and credit over 3, 5, and 10 years, returning 115% of the gains generated by the MSCI Asia ex-Japan index over the past decade6.
Q. What differentiates LOIM’s solutions?
A. Our strategy remains one of the largest global convertible bond strategies in the market and has capacity to manage inflows. The peer group has evolved significantly in recent years; there have been mergers, closures and changes to investment philosophy at competitor firms whereas our team and philosophy have remained stable.
Our long-standing and highly experienced portfolio management team follows an investment process that has been tried and tested over many market cycles – we are recognised as a safe pair of hands with a track record going back to 1987. We also run a number of innovative strategies and have the capacity to adapt to clients’ constraints.
to learn more about our Global Convertible Bond strategy, click here.
