Away from the pack: how convertibles enhance portfolio diversification beyond equity and credit markets

Diversification across regions and sectors

Convertible bonds offer differentiated exposure relative to traditional equity and credit markets, driven by the unique structure of the instrument and the distinctive profile of issuers accessing the asset class.

Convertible bonds act as a bridge between debt and equity because they contain an embedded equity option. The option gives investors the potential to convert the bond into shares and participate in the upside of the issuer’s stock, offering exposure to equity-like returns but without full exposure to equity risk. At the same time, convertibles pay coupons like a traditional debt instrument, providing downside protection should the equity option not be exercised.

Global by design, convertibles enhance regional and sector diversification. Compared to major indices (Figure 1), they offer greater exposure to Asia and reduced concentration in US mega cap technology names – particularly the so-called Magnificent Seven¹. Sector allocations also differ meaningfully: equity investors gain more exposure to utilities and consumer discretionary, while credit investors benefit from increased allocations to technology and utilities, with lower exposure to communications and energy.

This complementary profile makes convertibles a powerful tool for portfolio diversification and potential risk-adjusted performance enhancement.

FIG 1. Global convertible bond exposure by geography relative to global equities and global high yield²

Fig 2. Global convertible bond exposure by sector relative to global equities and global high yield³ 

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

A very different credit exposure

For fixed income investors, convertible bonds give access to a unique profile of issuers and solid credit quality. Approximately half of all convertible bond issuers have only convertible bonds as listed debt, with no other tradeable debt. This creates a credit exposure that is structurally distinct from traditional high yield (HY) markets, where issuers often carry multiple layers of debt.

Compared to a traditional bond, the equity option reduces sensitivity to both interest rates and credit spreads. And historically, the convertible bond universe has demonstrated higher average credit quality and lower default rates than high yield, even among similarly rated issuers⁴.
 

The asset class includes a blend of investment-grade names and high-growth, B-rated US companies. Growth companies typically issue convertibles to fund expansion and innovation –not just to refinance existing liabilities. This growth-oriented use of proceeds, combined with the optionality to convert into equity, offers investors exposure to innovation with downside protection. 

Convertible issuers tend to maintain simpler, longer-dated debt structures, reducing the likelihood of cross accelerations or defaults. During the COVID-19 pandemic and through the recent period of higher rates, we did not observe a significant uptick in defaults – unlike that seen in HY issuers – helping to limit drawdowns for the asset class.

Read more: Gaining exposure to growth and innovation through convertible bonds

A disciplined approach to convertible bond investing

With a legacy built on decades of experience, our investment philosophy is anchored in downside protection and capital preservation. Our flagship Convertible Bond strategy maintains investment-grade quality at all times, focusing on balanced issuers with the most compelling risk-adjusted return potential.

We take a high-conviction approach to portfolio construction – actively positioning across geographies, sectors, themes and styles to capture clear performance drivers. A strong bias toward high-quality credit underpins our belief in delivering long-term results.

Combined with our rigorous process and consistent liquidity management, we offer investors a dependable solution for scalable, resilient mandates.