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On course for converts: selectors reveal bond managers to back

On course for converts: selectors reveal bond managers to back

When doing battle in today’s environment, convertible bonds have shown their investment credentials.

Their unique ability to transform from debt to equity has meant that for many, they have become the weapon of choice in the hunt for yield.

Here four leading fund selectors from across Europe and the US name the fund managers they are backing to outperform regardless of what markets throw at them.

Bruce Amlicke, UBS

Credit funds are the smaller part of our Alternative Ucits fund of funds strategy and we like working with strong fixed income managers who are able to be dynamic and flexible during a period of uncertain interest rates.

This is particularly true around things such as reducing duration aggressively. We have been looking closely at the convertibles space and I think the market requires something different, as existing funds all have a long bias, so we are looking at strategies where this is not the case.

In a similar way to the other credit funds we hold, such as the Legg Mason Western Asset Macro Opportunities Bond fund, we want to work with hedge fund companies we have known for some time.

The convertibles market could provide an opportunity to diversify exposure away from the US, with new products covering a wider range of geographies. With that in mind we have been exploring the best way to tap this potential in the offshore market.

However, the area we are probably most excited about is event driven funds because of M&A activity, as well as the high-profile deal breakers and the volatility this has caused. This has provided some entry points, so we will be looking at increasing our exposure in the near-term.

Meinrad Vierling, m4Invest

In the present low interest phase, we still believe convertibles are a very interesting asset class.

Based on their participation in stock markets, they offer significantly better income chances than loans.

The return from loans is extremely modest and we assume that the current level of interest rates will persist.

Convertibles show lower interest rate sensitivity than loans and unlike shares, their asymmetrical risk profile offers better protection against falling exchange rates.

We favour the Jupiter Global Convertible fund, which invests on a global basis allowing its experienced managers Miles Geldard and Lee Manzi to set up a diversified portfolio according to regions and branches.

The investment process, developed by Geldard, combines a top-down macro-economic analysis with quantitative and qualitative research, and results in a well risk-adjusted return.

We also like the AgaNola Global Convertible Focus fund for defensive investors. Convertible specialist Stefan Hiestand and his team build quantitative and qualitative approaches into their selection process.

Frank Bock, Infiba Vermogensverwaltung

The global convertible bond market has posted positive returns across regions on the year, and the US has done especially well, outperforming broader equity and debt markets as well as convertibles across other regions.

We took account of this development by shifting assets to US convertible bond funds like the Man Convertibles America fund as well as moving to funds with a larger portion of their investments in US convertibles.

Funds we favour include the Oaktree Global Convertible Bond fund (53.6% US holdings) and the Macquarie MS Convertibles Global Markets (62% US holdings) as well as the UBS Convertible Global fund with a 44.4% US weighting.

As of the end of August, global convertible issuance came in at the highest level in the post-crisis era and has now reached €51.5 billion, well ahead of last year’s total. High levels of issuance are a positive for the asset class since they provide diversification, improve liquidity and increase the overall asymmetrical profile of convertible bonds.

We remain positive on the convertible asset class for the remainder of this year, and think that convertibles will continue to benefit from steady stock and credit market performance.

Silvia Bocchiotti, LCL Banque Privee

In an uncertain environment where geopolitical tensions are expected to subdue growth, convertible bonds are a key part of the success story enjoyed by conservative products offering relative capital preservation and lower volatility.

The asymmetry makes convertible bonds an all-weather vehicle as their convex return profile is able to capture a significant portion of the equity gains, but with less volatility, while the bond part provides downside protection in declining markets.

In addition, their credit exposure offers an opportunity to take advantage of further potential spread tightening with less sensitivity to interest rate movements than traditional corporate bonds.

In terms of geographical exposure, we prefer the global convertible universe as it offers good diversification. Indeed, there are lots of differences between areas. The US primary market, even though it is the largest convertible bonds market in the world, is heavily concentrated in the IT and biotech sectors.

Furthermore, a lot of US convertible bonds have high deltas and therefore behave more like equities. Europe is a more balanced convertible market offering ideal convexity exposure and Japan stands out for being the busiest primary market over the past 10 years.

We like Nathalia Barazal who runs the LO Funds Convertible Bond fund, Pierre-Luc Charron’s Amundi Funds Convertible Global and Antony Vallée’s JP Morgan Global Convertible Income fund.

We are also looking at other funds like the Ellipsis European Convertible fund and BlueBay Emerging Markets Convertible Bond fund. The latter tries to take advantage of emerging markets convertible bonds, the fastest-growing issuance zone within the global convertibles universe.

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