Right time for convertibles but fund selectors lukewarm

State Street Global Advisors (SSGA) is focusing part of its fixed income portfolio on global convertible bonds due to expectations of higher interest rates and a stronger equity market over the next 12 months, but fund selectors are only mildly interested in the asset class.

Right time for convertibles but fund selectors lukewarm


At a recent media briefing, SSGA head of EMEA strategy and research for SPDR ETFs (exchange traded funds), Antoine Lesné said there was a strong case to be made for convertible bonds in a fixed income portfolio.

He said that while bonds lose value in a high interest rate and high equity market environment, the conversion option gained more value than the loss of the bond value as share prices increased.

“They are protecting against the negative impacts of rising rates and that is something we like in this type of environment,” Lesné said.

He said the market was in the last phase of the expansion cycle when equities continued to do well while the rate cycle started to adjust to higher levels of economic growth.

“The growth outlook remains robust and positive for equities. You can capture part of this with convertible bonds thanks to the equity option. Meanwhile the interest rate sensitivity is lower than global high yield and global investment grade corporate indices,” he said.

“As a consequence, this current phase clearly favours convertible bonds over more rate sensitive exposures.”

Lesné noted the best environment for the asset class was low interest rates and a high equity market, and the least favourable situation for convertible bonds was high interest rates and a low equity market.

Fund selectors

Research by PA‘s sister title Expert Investor found that European fund selector sentiment for the asset class continued to hover in the “gentle and positive but not-close-to-bubble territory”.

Sentiment for convertible bonds did grow by 7% over the last quarter leading to the asset class coming third in terms of the largest positive quarterly shifts in sentiment.

France and Germany were found to have strong demand for the asset class while the Nordic countries were not so keen.

Lesné noted that fund selectors should be wary that the asset class is more niche than others and there were varied types of offerings from active managers, including different types of indices.

“Active managers will often look to outperform the indices that are most focused on the hybrid part of the universe by buying bonds which have more value (like when the equity option value is low) or ‘ride’ the delta as the equity appreciation leads performance. We believe in investing in the overall market as a provider of exposure,” he said.

“Fund selectors should also look at the concentration of risk in the portfolio as the Steinhoff case could have reminded us in December 2017.”

In terms of fixed income portfolio allocation, Lesné said since the long-term volatility of global convertible bonds unhedged hovered between 7% and 9%, depending on indices, a 10% allocation would have some significant impact on the average bond portfolio for which the volatility might be more in the 3% to 5% region.

“The allocation will then really depend on investors’ choice and risk appetite but 5% to 10% of the fixed income allocation is on the high side,” he said.

Top European global convertible bond funds

According to data from FE Analytics, the top European global convertible bond fund, Swisscanto Bond Coco (convertible capital bonds) fund returned 28.55% for the three years to 31 December 2017.

This fund was followed by Calamos Global Convertible Opportunities fund at 18.54%, UBS (Lux) Bond Sicav – Convert Global (EUR) fund at 16.5%, Franklin Global Convertible Securities fund at 15.99%, and Jupiter Global Convertibles at 14.72%.

The convertible sector average returned 8.97% during the same period.

Top five European global convertible bond funds three years to 31 December 2017

The Swisscanto fund invests 99.6% into financials and 0.4% into asset/mortgage-backed securities. Region wise, the fund invests 75% into Europe ex UK, 20% into UK, 3.7% into Americas, and 1.4% into North America.

Second-place Calamos, has its highest sector weightings into telecom, media and technology at 23.6%. North America accounted for 51.1%, followed by Europe ex UK at 24.5%.

For the sector average, telecom, media and technology had the largest sector weighting at 17.27%, followed by industrials at 13.95%, and financials at 12.12%. Europe ex UK had the highest region weighting at 29.75%, followed by North America at 18.1%.

The top funds were chosen using FE’s FCA Recognised universe and were domiciled in Luxembourg or Ireland.


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