Although there are notable investment grade issuers in convertibles such as Bayer, Boeing and Vodafone, officially most of the market is without a rating. Using the TReuters index, approx 60% of issuers have no rating. This does not imply that the convertibles are mostly non-investment grade, but the lack of coverage does cement a higher level of credit risk uncertainty. Practitioners will generally highlight how to varying degrees, high-growth mid-to-small caps tend to be popular issuers in both high yield and convertibles.
When assessing risk and return of different fixed income assets then, given the positive attributes of convertibles, investors would understandably wonder why convertibles have delivered low returns relative to the risk taken. Indeed, even excluding the financial crisis, investors would probably have had better risk-adjusted returns without convertibles in their portfolios. But this is where active management comes into play. An active manager can reposition the portfolio’s sensitivity to equities during rising and falling markets in order to mitigate drawdown and maximise upside.
Ideally they have the skill in not only ensuring that they have identified investment worthy credits, but they are able to capture the as much upside during an equity market rally.
