white papers
Convertible bonds: a valuable tool during times of uncertainty
One of the lesser-known advantages of the convertible bond asset class is that growth companies are disproportionately represented when compared to global equities. Technology companies represent close to a quarter of the market, followed by the communications, consumer discretionary and industrial sectors. Many companies in these sectors are expected to outperform the market during and after the current pandemic-related crisis.
The primary convertible bond market has been in rude health since the end of Q1 2020, boosted by an acceleration in new issuance. USD 92 billion of convertible bonds were issued in the first half of the year and if the current pace continues, 2020 will be the best year for issuance since 2007.
Crucially for investors, this wave of new paper has been issued amid attractive technical profiles, as many companies are issuing convertible bonds before their shares have recovered from the significant market decline in March. Additionally, diversification is increasing with issuance not only coming in the form of ‘rescue capital’ from those companies most affected by COVID-19, but also from high-growth companies in the technology and consumer sectors.
Historically, convertible bonds have outperformed global equities during higher volatility environments
After the coronavirus crisis tore through global financial markets March, and despite the strong market rebound in Q2, tactical opportunities around mispricing are unusually striking.
Following the sharp downturn in risky assets at the end of Q1 2020, the yields of a number of convertible bonds ended up higher than their equivalent straight bonds (same issuer, same seniority, similar maturity). This is not a common occurrence. In fact, the level of dislocation between the remuneration of credit risk of convertible bonds and straight bonds has not been seen since 2009.
Additionally, the long-term options embedded in convertible bonds do not reflect recent equity market volatility, reinforcing the attractiveness of current valuations.
The case for a strategic allocation to convertible bonds also remains strong. At heart, the asset class’ structural ability to retain upside equity exposure, while having an element of downside protection in the event of an equity correction – an asymmetrical return profile – underpins its long-term usefulness in strategic asset allocation.
This asymmetry could prove especially valuable in the current market climate, where overall market returns may be constrained and volatility levels are elevated (historically, convertible bonds have outperformed global equities during higher volatility environments).
In this white paper, we outline why convertible bonds are once again proving to be very valuable to investors during times of uncertainty.
Informazioni importanti.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.
