Mid-Year 2026 Investment View: Convertible Bonds

Summary

• Convexity was tested and confirmed in H1, with convertibles capturing less of the downside and participating meaningfully in the recovery.

• Higher yields have restored the relevance of the bond floor, improving the defensive qualities of the asset class.

• New issuance, broader participation and a more diverse issuer base have expanded the convertible bond opportunity set.

• Active management remains essential as high-delta exposure, momentum concentration and credit-quality drift create risks within passive benchmarks.

What did H1 change for convertible bonds?  

H1 2026 was a defining moment for convertible bonds, with the asset class proving its relevance precisely when markets tested it. Most importantly, convexity was rigorously tested and confirmed. During the first quarter, leading up to the market bottom on 30 March, the FTSE Global Focus USD Hedged Index declined by 2.27%, while its parity fell by 5.84%, reflecting a 39% participation rate in the downturn. The subsequent recovery to 29 May was also notable, with the index rising by 12.68% compared to a 20.74% increase in its parity, demonstrating an upside capture of 61%. Over the same period, the MSCI World USD Hedged Index gained 16.73%, underscoring the asymmetry and diversification benefits that convertibles can provide.

The first half also marked a step change in the primary market. With over USD87 billion already issued in 2026, the market is on track to meaningfully surpass last year’s record USD160 billion. Importantly, this is not just a story of volume. The pipeline is broad, diversified and increasingly dominated by high-quality structures with real bond floors.

Finally, the investor base has broadened. Record secondary volumes, a more diverse issuer base across sectors and geographies, and growing institutional participation all point to an asset class that is no longer niche. H1 did not simply reinforce the case for convertibles; it showed that the market has become deeper, more relevant and more central to institutional portfolios.

Why does convexity matter now? 

Convexity – the asymmetric payoff profile of convertibles, participating in equity upside while the bond floor limits downside – has always been the theoretical focus of the asset class. But it has rarely been more practically relevant than in the current environment.

The case rests on three pillars.

1) Dispersion is high and rising. When equity markets move broadly in one direction, convexity is less valuable – investors are better served by simply owning equities or bonds. But when outcomes are dispersed – some stocks up 50%, others down 30%, driven by earnings surprises, policy shifts, or structural disruption – the ability to participate selectively in winners while having a bond floor under losers becomes genuinely valuable. H1 2026 delivered exactly this: a handful of AI, semiconductor, and infrastructure names drove most of the benchmark's returns, while many others lagged or fell. Convexity, when applied to the right names, captures the former while limiting the cost of the latter.

2) The bond floor is real again. After a decade of near-zero rates during which the fixed income component of convertibles offered little protection, the current yield environment has restored the bond floor to meaningful levels. 

3) Macro visibility is unusually low. When the range of potential outcomes is wide, investors face a genuine problem of positioning: be too defensive and miss the recovery, be too aggressive and suffer the drawdown. Convexity is structurally suited to this problem. It is not a bet on a single outcome; it is a way of staying invested across a range of outcomes at an asymmetric cost.

Where has the opportunity set improved? 

Several areas stand out where the investment case has strengthened materially in H1:

1) AI-linked dispersion. The AI investment cycle has created a rich environment for convertible bond investing - not by owning the largest hyperscaler names (which tend not to issue convertibles) but by accessing the ecosystem: infrastructure providers, software enablers, data management, and the power/cooling layer. Many of these companies are at a stage where convertibles are a natural financing instrument – high growth, but with uncertainty around profitability timelines – and the dispersion of outcomes within this group creates genuine stock selection opportunity. CoreWeave, Nebius, Cloudflare, and Snowflake have all been meaningful contributors YTD from this angle.

2) SMID exposure. The SMID segment (sub-USD5bn market cap) has historically been underserved by passive approaches (13% of the global focus index) and offers a richer opportunity set for active managers willing to do the fundamental work. These companies are less covered (40% of SMID issuers have fewer than 10 analyst followers vs. 88% for large caps), offering genuine alpha for bottom-up stock pickers. Adding 20% SMID exposure to a convertible allocation has historically generated +50bps per annum since January 2019 while reducing volatility by 10bps, according to our calculation. Valuations in SMID have compressed relative to large cap over the past five years, and many of these companies – particularly in healthcare, industrials, and specialty tech - are approaching the convertible market at structurally attractive entry points.

3) M&A activity. After a subdued period, M&A is recovering – and convertible bonds are disproportionately exposed to this dynamic. A takeover bid typically triggers change of control provisions that accelerate conversion or require redemption at a premium, generating significant upside for holders. The current environment - corporates with strong balance sheets, private equity capital looking to deploy, and regulatory scrutiny easing in some jurisdictions - is constructive for M&A optionality embedded in convertibles.

Where are you cautious?

We are most cautious on areas where convertible bonds have started to behave more like equities than balanced instruments. This is particularly true in the high-delta bucket, where names trading at 80–100 delta offer limited bond-floor protection and are, in effect, equities with a maturity date. In a market where several of these names dominate the benchmark, passive investors are forced to hold them, while active investors can choose not to. We remain structurally underweight this segment.

That caution also extends to momentum concentration risk. The benchmark’s increasing exposure to a handful of high-momentum names is a structural feature of the market that active managers need to manage carefully. We do not chase rallies in names where conversion premiums have compressed to near zero; instead, we prefer to look for the next layer of the same theme at more attractive entry points.

Geographic concentration is another area of focus. Portfolios that are overly concentrated in US technology risk being left exposed with insufficient downside protection if the sector corrects. For us, diversification across Europe, Asia and non-technology sectors such as healthcare, industrials and consumer is not simply a preference; it is part of structural risk management.

Finally, we are alert to credit-quality drift. As issuance volumes rise, the quality of some issuers at the margin is beginning to deteriorate. Maintaining credit discipline and avoiding the temptation to reach for yield in weaker names remains a priority.

How are you positioned, and where would you add if volatility creates better entry points?

The portfolio enters H2 with a clear emphasis on balanced convertible profiles, selective growth exposure and genuine diversification away from the benchmark. At the core, 89% of the portfolio sits in the 40–80 delta range, with an average delta of 63%. This is slightly above the benchmark, but still firmly in balanced territory, where convertibles can offer meaningful equity participation alongside a genuine bond floor.

The growth tilt, now 47% of the portfolio, reflects conviction in the AI infrastructure cycle, healthcare innovation and select software names. Importantly, this is not a momentum allocation. It is built on fundamental views around earnings durability over a 2–3-year horizon. The portfolio also looks very different from the index, with active share of 84% and off-benchmark exposure of 24%. Small- and mid-cap exposure is 31%, compared with 13% for the benchmark, while meaningful allocations to precious metals, energy infrastructure and Japan provide sources of return that are less correlated to the factors driving the benchmark.

This positioning is supported by a strict portfolio discipline. We hold 50 positions and follow a ‘one in, one out’ approach, meaning every new idea must displace an existing holding. This enforces ongoing portfolio review and helps prevent the slow accumulation of legacy positions.

If volatility meaningfully increases, we would look to add selectively in areas where structural opportunities remain compelling but entry points could improve. Semiconductors and semiconductor equipment are a good example. This has been the largest source of passive drag in H1, and we have deliberately stayed away from the most momentum-driven names. A correction, whether driven by earnings disappointment, inventory cycles or macro softening, could create attractive entry points into a structurally important sector where convertible structures may become available on better terms.

Healthcare is another area where we would add selectively on weakness. The allocation has already been increased to 13%, representing a 4.8% overweight, and the sector remains well suited to convertible investing. Binary clinical outcomes create exactly the kind of dispersion that convertibles are designed to navigate. We would also look for opportunities in European industrials and energy transition, where a broader repricing of European assets on macro concerns could create attractive entry points into quality industrial names with compelling convertible structures and credible equity catalysts.

Finally, Japan remains a deliberate allocation. Any equity market correction would be an opportunity to deepen exposure, given the continued appeal of the structural reform story and the availability of interesting convertible structures at reasonable valuations.

Return to Mid-Year 2026 Investment View

The companies referenced in this insight are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. The information provided is to illustrate our current investment activities and approach only, and should not be construed as offer, research or investment advice. Past performance and other indicators or metrics do not predict future outcomes. Please read important information at the end of this communication.