“You can always be wrong,” says Tarek Saber, manager of the NN Global Convertible Opportunities Fund, when asked about the attraction of convertible bonds.
“For us, convertible bonds are a less painful way of investing because you always have the bond floor as a parachute.”
It is clear that Saber, who has been investing in convertible bonds since the early ’90s, is used to having to argue his case.
While he believes the asset class has grown up a lot in recent years, he says there is still misplaced fear about convertible bonds in the market, partly because of ignorance – until 2008, he says, it was very hedge fund focused.
The other issue for some is the confusion around where convertible bonds sit: should they form part of an equities or a fixed-income bucket?
“This has been an argument since I have been in the industry – and that is going back 27 years. We think it should not fall into either of those two buckets but should bridge the two – a separate allocation entirely.
“Investors should look at what convertibles can contribute to their portfolio as a whole,” Saber adds with an air of resignation.
“It does depend somewhat on geography. In Switzerland, for example, investors are generally conservative and only tend to get their equity exposure through convertible bonds, whereas in the UK, it is a bit more ‘Marmite’. Investors are either wholly equities or bonds, they often do not mix.
“I have read many stories about the demise of convertibles over the years, and we are still here. Under
Solvency II rules they are treated favourably – they offer uncorrelated returns. You are getting equity-like returns with around half the volatility – that has to be exciting,” he says.
The size debate
According to Saber, the size of the global convertible market is about a quarter of that of the global high yield market, and global high yield has a separate allocation in almost all institutional mandates.
“We do not see any reason why convertibles should not have a dedicated allocation. Also, a lot of the issuers in the converts space are unique. In other words, they have no other issues outstanding, which adds to the diversification argument.”
That said, while he believes in the structure, he is quick to point out he does not invest in convertible bonds.
Rather, he says, he invests in companies and uses convertibles as the vehicle through which to access them.
This may well seem like semantics but it reflects the precision that he and his team try to bring to the investment process as a whole, a process that leads to a highly concentrated portfolio of around 30 holdings.
In the beginning
Saber joined NN Investment Partners (formerly ING Investment Management) from Avoca in December 2014, along with Jasper van Ingen, with whom he ran the Avoca Convertible Select Global Fund.
