Mirabaud – Convertible Bonds Europe
Secular growth stories and cyclicals
The Fund (I Cap EUR) is down 2.5% year to date, compared to -1.3% for the benchmark (Refinitiv Focus Convertibles Bonds Europe)*. This compares favourably with the main European equity indexes, which were down 12.27%** over the year to date. Convertible bond flows continued to hold up well during the sell-off and the asset class has played its role as a buffer. We have been active on the downside, shifting the portfolio and buying quality companies on weakness, benefitting from the tightening of credit spreads.
We have been actively monitoring the portfolio, adding quality and investment grade companies with liquidity and access to credit. As the market situation improved, we started buying some cyclical names. For example, we bought Safran, the French multinational aircraft company, Amadeus, which is exposed to the travel industry, and Cyclical names such as Volvo. The primary market has also been very active, with many issues priced on attractive terms.
Elsewhere, the Fund continues to be exposed to secular growth stories, investing in companies that were already underweight before the crisis and are now benefitting from structural trends. These include food and grocery delivery companies, technology companies working on the internet of things, autonomous vehicles and the payments services industry.
Valuations look attractive
We currently have a Delta of 45% versus 41% for the benchmark. We have a convexity of -6 + 7.7% and for equity performance – 20 plus 20. We have a distance to flow of 14% and a current yield of 0.8%. We are also investing in value names on a tactical basis, balanced between Cyclical and Defensive growth in terms of Delta contribution.
We remain conservative as a result of the coronavirus crisis. However, given attractive valuation levels, we are more than willing to add some credit risk to capture yield and add some equity sensitivity. Recently, our Delta has been ranging between 40 to 45%.
In terms of technicals, we believe we are half-way to recovery. European convertibles are still cheap on a technical basis. Europe is becoming more attractive for investors. The main European indices are still down around 12%**, but we have seen that Europe has the potential to catch up with other regions. This is helped by a strong policy mix and an agreement on the Recovery Fund is highly likely. In short, we are still very positive on the asset class from a technical perspective and furthermore, we think the Eurozone is becoming more attractive.
Mirabaud – Convertible Bonds Global
Convexity is key
The Fund (I Cap USD) has gained by 5.57% over the year to date, marginally outperforming its benchmark (Refinitiv Global Focus Convertible Bond Index USD Hedged) *. Convertibles have regained their competitive advantage in a period where global equities are down 6.80% so far this year***.
The convexity of the strategy has been clearly demonstrated with its lower volatility. But it’s not simply the Convertibles that make the strategy work – it’s also how they are managed to achieve a particular objective. Our high conviction style, based on bond picking in a concentrated bond portfolio, combined with active management, has proved to be very successful.
We also invested in a balanced profile that offered higher equity sensitivity, mostly in the US. As a result, our weighting in Japan went down from 25% to 5% when the US went up from 30 to 50%.
Positioned as a defensive equity strategy
The Fund is positioned as a defensive equity strategy. We currently maintain a very high exposure to securities with a balanced profile. The level of our equity profile is very low at 7%, while the bond profile is at 19%. Today, the Fund holds 48 positions versus 200 for the benchmark. We have an active share of 91% and a weight outside the benchmark of 2%. Furthermore, we recently took positions in Air Canada and Palo Alto, for example and we have also invested in Mid-Cap names that have lagged the rally so far.
In terms of our Delta positioning, we continue to concentrate our equity exposure on our high conviction concentration in North America. This is just over 50% of the Delta contribution. Elsewhere, we have 18% in Asia, 14% in Europe and 5% in Japan. The top six sectors make up about 50% of the Fund’s equity sensitivity - Information Technology, Healthcare, Communications, Consumer Discretionary, Industrials and Materials.
We believe that is the primary market continues to go higher, this will be another driver of returns and we expect the recovery prospects for our asset class to remain strong. Even if the environment changes, we know that we can increase or decrease our Delta accordingly.
*Mirabaud Asset Management, as at 19 June 2020
**FE Analytics, MSCI AC Europe All Cap Index, in €, year to date to 19 June 2020
***FE Analytics, MSCI ACWI All Cap TR in USD, year to date to 19 June 2020
