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Converts market ‘frozen by volatility’, says AAA-rated manager

Converts market ‘frozen by volatility’, says AAA-rated manager

The convertible bonds market has become ‘frozen by volatility’ and new issuance has ground to a halt limiting buying opportunities, Citywire AAA-rated Marc Basselier has said.

Basselier made the comments in the latest update for the €479 million AXA WF Framlington Global Convertibles fund.

Commenting on recent market events, namely the Volkswagen scandal and the sell-off seen at the end of August, Basselier said the downturns have led to a more cautious trading environment in the convertibles sector.

‘The downturns are part of the formation of yields over the long term and the market is currently weakened by the lack of any cushioning of bond yields and by investors paying too much attention to results by the calendar,’ he said.

Basselier said he has therefore found little to invest in and only made one addition over September, which was Japanese chemicals company Unicharm.

‘The primary market is limited, in any case. Issues were expected in September but the market was frozen by volatility and we don’t currently know whether these issues will take place in October or in January of next year,’ he said.

Basselier said the bond market as a whole has suffered from the knock-on effect of turbulence, although he said convertibles have fared better than other risk assets.

‘Liquidity is still low and in the absence of any sizeable redemptions on the funds, our better performance can also be explained by a wait-and-see policy and the lack of any sell pressure,’ he said.

‘Consequently, I believe that convertible bonds have become more expensive compared to other assets, relatively speaking.

‘Nevertheless, I do not anticipate any radical changes in the current valuation; it is still contained and reflects the appeal of the risk profile of this asset fairly well in relation to the other risk asset classes, particularly as the weaker issuers in the segment have well and truly suffered during the month, coming out in sympathy with private sector bonds of the same type.'

The fund currently has 39% exposure to the US, 12.4% in Germany and 11.9% in Japan. This is while IT (21.4%) makes up the largest single sector bet, as at the end of September 2015.

The AXA WF Framlington Global Convertibles fund returned 13.3% in US dollar terms over the three years to the end of September 2015. Its Citywire-assigned benchmark, the Thomson Reuters Global Focus Convertible EUR Hdg, rose 5.94% over the same period.

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