During the first quarter of the year, convertible bonds were one of the most attractive assets, especially after seeing the first signs of the return of volatility to the market. In this second quarter of the year, this type of asset has continued to please investors.
As explained by Arnaud Brillois, Head of Convertibles at Lazard Asset Managementand and manager of its long-term convertibles, the main advantage of this asset is that it allows investing in attractive and volatile stocks, limiting risks.
“The greater the volatility of the underlying stock, the greater the value of the convertible bond. In addition, due to its main virtue, convexity, convertible bonds increase their exposure to equity with a rise in the underlying, and market exposure decreases with the fall of the underlying,” says Brillois.
Undoubtedly, the return of volatility and the investor’s certainty that it has come to stay, drives the popularity of this fixed income asset. According to RWC Partners, “the market has been assessing a level of volatility that is too low for the current level of stock valuations and the point in the economic cycle.”
Finally, Brillois points out as another positive characteristic of this asset that they have a short average life of 2.5 years and, consequently, “the impact of interest rate hikes is limited”.
Convertibles are among the very few asset classes that offer positive exposure at increasing levels of volatility. According to RWC Partners, this has also led to increased issuances within the convertible bond market.
“This increase in issuance is a trend now and is expected to continue as rates increase further. January 2018 saw spectacular increase of 120%, compared to the same period last year,” he says.