Convertibles as an option in times of low interest rates?

With an asymmetric risk profile and the possibility to exchange the bonds into equity, convertible bonds offer opportunities in different markets. Still, Absolute Research advises investors to invest via an asset manager.

Absolut Research has analyzed European asset managers for convertible bonds and shows which investment opportunities this asset class offers to institutional investors. The results - published in the latest paper of their series Absolut|analyse - show that convertibles have their strengths “especially in insecure monetary policy phases, in which future inflation and interest rate development are not foreseeable”, says Absolut Research in a press release regarding their publication.

Convertible bonds are fixed income products that offer the right to exchange the bond into a fixed number of shares of the issuing company. With decreasing interest rates and increases equity market, the bond and share component of the convertible wins, says Absolute Research. With increasing interest rates and share prices, the bond component loses while the share component wins. According to Absolute Research, the convertible will develop according to the share price in such times. With falling equity prices, the bond component will limit the loss faced by investors. Only with rising interest rates and falling share prices, convertibles would lose. The analysis of Absolute Research shows that convertibles participate in rising share prices by two thirds, but only by one third from falling share prices.

In Europe, the performance of convertibles (measured with the Exane Eurozone Convertible Bond Index) lies between the return of share markets (EURO STOXX 50 Net Return) and the one of pure bonds (Absolut Research - Average Euro Corporate Bond). Globally convertible bonds have even outperformed share markets. Global convertible funds have achieved average annual returns of 7.72 percent within the last three years. European funds have gained 8.18 percent annually.