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About this podcast

Central banks around the world are on the path to normalizing interest rates, corporate earnings across regions are continuing to grow, and the prospect of higher volatility in global equity markets is increasing. Pierre-Henri explains the role that convertible bonds can play in a diversified portfolio, particularly in the current investment environment. Convertible bonds, he points out, allow investors to maintain a positive equity view while at the same time enjoying the protection that bonds can offer.

Transcript

Lydia

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?

Pierre-Henri

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.

Lydia

Why do companies issue convertibles? And what kind of companies are regular issuers?

Pierre-Henri

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.

Lydia

Why do you believe that convertibles present an interesting investment opportunity at this point in the cycle?

Pierre-Henri

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.

Lydia

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?

Pierre-Henri

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.

Lydia

How would you describe your investment philosophy and process? What do investors get when they allocate to global convertible bonds with BlueBay?

Pierre-Henri

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.

Lydia

Thank you for this very useful introduction to convertible bonds at BlueBay.

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A note on forward-looking statements
This report may contain forward-looking statements about future performance, strategies or prospects, and possible future action. The words "may," "could," "should," "would," "suspect," "outlook," "believe," "plan," "anticipate," "estimate," "expect," "intend," "forecast," "objective" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.