My name is Lydia Chaumont. I'm the Institutional Portfolio Manager for Global Convertible Bonds at BlueBay Asset Management. I'm joined here by Pierre-Henri de Monts de Savasse, head of Global Convertible Bonds at BlueBay.
Pierre-Henri, could explain how a convertible bond differs from a conventional corporate bond?
Convertible bonds have all the features of traditional bonds. When investors buy convertibles, it provides funding to the issuer until a fixed maturity, and in the meantime they receive interest payments. Where it gets really interesting is that in addition to the traditional bond features, convertible bonds offer investors the possibility to be delivered a fixed number of shares.
Obviously, if shares do well, this conversion option becomes highly valuable and allows for a strong performance.
Why do companies issue convertibles? And what kind of companies are regular issuers?
The main reason why companies issue convertible bonds is that it reduces their interest payments as compared to traditional bonds. These mechanics attract many companies across a large range of sectors which offer active investors many diversification opportunities. However, there are two strong sector biases among convertible bond issuers. First, financial issuers such as banks and insurance are very rare in our universe. Second, high growth sectors are heavily represented.
In fact, convertible bonds are a very attractive financing tool for new economy businesses, such as software or biotechnology.
Why do you believe that convertibles present an interesting investment opportunity at this point in the cycle?
The largest central banks are on the path to policy normalization, and investors are starting to wonder if the returns of equities in the previous years can be repeated. Of course, there is still plenty to be positive about. Corporate earnings continue to grow at double-digit rates across all regions. However, there is a sense that financial markets could become more volatile and choppy. Convertible bonds are the ideal asset class at this juncture, as they allow investors to maintain a positive equity view but with the protection of the bond complement. It avoids suffering the emotional rollercoaster of large losses in volatile markets.
Historically, convertibles have provided protection and performance for investors in periods like 1999 and 2009 when core rates had been rising. We're in a similar environment in 2018. How do you explain this?
The key questions is: why do interest rates rise? The simple answer is that central banks raise rates because the economy is doing well. If the economy does well, it means that corporate earnings do well, and therefore equity markets tend to perform strongly.
This is why historically periods of rising rates have been very favourable to convertible bonds, as the equity compound of the asset class allowed for higher returns. In fact, this is a remarkable feature of converts. They are a bond investment that does very well when rates rise.
How would you describe your investment philosophy and process? What do investors get when they allocate to global convertible bonds with BlueBay?
BlueBay's investment process for convertible bonds relies on three core values. First, fundamental analysis is at the core of everything we do, and it is a main driver of performance for our investors. Second, our experience tells us that convertible bonds are a unique asset class and that they deserve a tailor-made portfolio construction process. Finally, we have a strict discipline in terms of risk management and portfolio rebalancing.
Thank you for this very useful introduction to convertible bonds at BlueBay.