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This episode, Pierre-Henri de Monts de Savasse, Senior Portfolio Manager, BlueBay Asset Management, provides an update on convertible bonds amidst the economic recovery. Pierre-Henri also discusses the potential long-term opportunities ahead for the asset class in an environment of rising rates and inflation. [7 minutes, 58 seconds] (Recorded April 22, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson, and I am really excited to be joined today by Pierre-Henri de Monts de Savasse. His friends affectionately call him PH, and he focuses on and is investing in convertible bonds at BlueBay Asset Management in London. PH, welcome back to the podcast.

Hi, Dave. So good to see you again.

Always great to see you, and I think I mentioned in an email after your appearance last year on the podcast, my mom declared your appearance the top performance of 2020 on the podcast. So congratulations.

She's got great taste. Thank you.

She does. It was a great appearance. Hopefully a lot of people listen to what you had to say on the last podcast, because at that point you were talking about convertible bonds. You were talking about the great environment that you were seeing for convertible bonds at that time. I believe, to be specific, you were on and around the October and November timeframe. How have things played out since then in the convertible bond market? And how do you think the convertible bond market is set up for the remainder of 2021?

You're absolutely right, last time we spoke, Dave, it was before the US election, before we had vaccine for the Covid, so we were riding the Covid crisis. And converts were doing very well and we felt very positive about it with the team. Since then, a lot happened. These developments were very positive for the asset class. Last year, converts returns, depending on which benchmark you look at, were between 25 and 30%. So, a very strong performance. And now we find ourselves in a bit of a new world, which is not exactly the Covid world, but the post-Covid world. And I actually think that converts will continue to do very, very well. So maybe it’s worth an explanation. If you give me a few minutes, what do I mean by post-Covid world? I mean, there are a couple of themes that have emerged. First, I think growth is going to be very strong. Activity is picking up very fast. A reopening is happening. Consumers have saved a lot of money during these meltdowns and we really anticipate very strong growth, which means that corporate earnings and companies are going to do very well. And that's really important. Some people, some market participants I meet are saying: equities have done so well, we’ve gone so far, I'm a bit worried. And you know what, I hear that. I think it's quite right to be a bit worried. However, the backdrop, the fundamentals are super strong. So there you are. You're in this world where things are really good. You probably still want to be pro-risk, as we say in our lingo, you still want to buy equities, however you want to protect yourself in case you've got to sit back. Uncertainty is there for sure. I mean, policy plays such a big role in this recovery, both monetary and fiscal, that, if anything changes a tiny bit, we can have a bit of a correction. And that's where converts are really great because they allow you to keep your equity exposure, to play this recovery, if you will, but at the same time with fairly limited risk. We wrote a piece a few years back saying that converts were giving you equity exposure without the sleepless nights. And I think this is still very much valid and that's why the asset class is very well positioned in this post-Covid world.

So PH, if we look at what we've seen happen in fixed income markets in the first quarter of this year, and just to highlight Canada, if I look at the three-month return to March 31st on the Canadian ten-year Treasury, the return is about minus 7%. So it's been a very tough market for bonds. Interest rates are rising. There's an anticipation that interest rates are going to rise in the future. Is that a concern at all for you with convertible bonds?

It's not so much of a concern, but it is a real opportunity. A real opportunity! So I think you’re absolutely right to highlight that. Inflation fears are here. Justified or not, but they're here, right? Long-term rates are pressure to the upside. And you're absolutely right. In the fixed-income world, your traditional boring safe bonds can have very negative returns. So that's a real worry. Now, you know that the BlueBay's a fixed income house and the convertible bond is part of the fixed-income team. So we think about that all the time, this relative value between converts and more traditional bonds. And so we studied and tried to analyze what happens to converts when rates rise. And convertible bonds are fairly short-term instrument; they tend to be more like three-to-five-years as opposed to seven-to-ten, in traditional fixed income, and obviously they benefit from equity rising. So, when interest rates rise, it has, in fact, little impact on the fixed-income component of converts. But, because rates rising usually correspond to a period of strong growth and strong equity markets, the value you're getting from your equity optionality is very large. So this is a fairly remarkable— though technical— but fairly remarkable feature of converts, which is that it's a fixed-income asset class with fixed-income risk, but it actually gives you positive returns and sometimes very strong positive returns when interest rates rise.

Yes. And interest rate rises are generally reflective of a very strong growth environment and that ends up being a positive. So, Pierre-Henri, one of the things that we've talked about on this podcast a lot with the various guests that we've had is the importance of diversification. Often Canadian investors think too much about diversification on the equity side of their portfolio, not enough on the fixed-income side. What I love about having you on to talk about convertible bonds is that it highlights the fact that you can have lots of diversification within your fixed-income portfolio. Particularly in an environment like this, in the environment that we're going into, this kind of diversification is critical. If you didn't believe me before, just look at fixed income in the first quarter of this year. If you're not properly diversified, if you're depending on government debt or sovereign debt, only for the fixed-income portion of your portfolio, you had a challenging first quarter. More broadly diversified fixed income did much better. So, Pierre-Henri, thank you very much for your time today, as always.

Thank you so much, David. It was a pleasure. And thank you for doing my job and promoting the asset class so well.

The pleasure is mine.


Recorded: April 22, 2021

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