Lower interest rate risk
We expect inflation to increase. In this environment, convertibles provide duration protection because they have a negative correlation to government bonds and are positively correlated to equities and corporate bonds. We expect equity returns will continue to be the primary driver in the near to medium-term.
High levels of new convertible issuance
Convertible bond issuance is strong, reaching an all-time high in 2020, bringing more names to consider in a range of businesses with compelling long-term fundamentals in every region, as well as replacements for holdings that have become too bond-like or equity-like. We expect this trend to continue as companies accelerate their capital raising efforts.
Convertibles remain attractively valued
We currently think valuations are attractive in convertibles, which remain cheaper relative to their long-term fair value, supported by higher market volatility as a result of the pandemic. Today valuations are a greater source of alpha than medium-term risk for the asset class.
We have reduced equity sensitivity relative to the benchmark given the scope for elevated levels of market volatility as we move through the pandemic. Any market correction will provide a good entry point to raise our equity sensitivity.
We expect shorter-duration and higher-yielding assets to outperform high-quality long-duration in the coming months. We have a higher level of credit relative to the benchmark, where the portfolio credit rating is equivalent to BB*, with a blend of investment grade and high yield names.
*Source: Mirabaud Asset Management as at 31/1/2021.
Benchmark is Rifinitiv Global Focus CB Hedged USD
We expect smaller companies to outperform because they combine a high level of cyclical exposure, which will lead to a good rebound in profitability with the unlocking of economies, with cheaper relative valuations.
We believe in a pure-play focus on convertibles where issuers have a sustainable focus to maximize convexity. We do not hold synthetic securities or options, which means the portfolio is completely transparent
- Lead management has been working together since inception in 2013
- A combination of trading and fundamental experience
- 60 years of combined experience in convertibles, having faced all phases of the credit cycle
Head of Convertibles
Senior Portfolio Manager
ESG and Convexity
Why responsible investing through robust environment, social and governance (ESG) criteria helps drive convexity