The remaining high concentration of fixed income assets in institutional portfolios requires creativity in the adaption of the asset allocation to the ongoing low yield environment. This potential reallocation may support convertible bonds, which are combining positive elements of both fixed income and equity instruments. The bond holder has the right to convert into a specific amount of shares of the underlying equity of the issuer. Generali Investments manages more than Euro 960 million of convertible instruments. Portfolio Manager Brice Perin is in charge of these positions. He met altii to explain his views, his management approaches and what drives him.
About Brice Perin
Since December 2013 Brice Perin has been responsible for convertible bond investments within the absolute return portfolios and for all Convertible Bond funds at Generali Investments. Prior to that, he was responsible for Volatility Funds in Acropole AM. From 2007 to 2011, he was responsible of Convertible and Volatility Arbitrage Funds within the Convertible Bond / Absolute Return Teams at la Française AM. From 1999 to 2007, he was Head of Convertible and Volatility Arbitrage at DWS Investments. Brice graduated from ENSAE Paris Tech (School of Economics, Statistics and Finance) and has an industry experience of 16 years.
altii: Mr Perin please explain the basics of the convertible investments you are managing. For whom are they beneficial?
Brice Perin: Convertible Bonds carry a multi-asset class profile of fixed income instruments with an underlying equity component. Therefore Convertible Bonds, carry an attractive asymmetry in terms of equity-like returns, downside protection and limited volatility. The asset class benefits from a self-adjusting, risk-adjusted return profile.
|Horizon||Market Value (€ bln)||Number of Securities|
|2015 (until November 2nd)||297.9||772|
Table 1: Global Convertible Bond Market. Source: Barclays Bank
The convertible market has developed consequently in the past years (Table 1). The global market value is now approx. 300 billion, and already at year-end values from the years before. The aforementioned convexity is extremely appealing in a context of market uncertainty, market volatility, and low interest rates.
altii: What is the size of your portfolio and how is it structured?
Perin: As of today we are managing more than Euro 960 million in Convertible Bonds. Of which Euro 400 mm via dedicated mandates for the Generali Group while the remaining 500+ million are split in open-ended UCITS funds invested in outright and absolute return convertible strategies. More specifically, investors who look into our absolute return convertible bond strategy usually seek constant returns across the market cycle within a regulatory vehicle that is UCITS compliant. The investors therefore benefit from a highly professional alternative investment solution. We have placed fundamental analysis (credit and liquidity) at the very beginning of our investment process backed by an 18-strong in-house credit research team, 13-strong macro research team and a dedicated equity research team.
Table 2: Global market rating breakdown. Source: Barclays Bank
As a matter of fact, almost half of the convertible bonds issued on the markets are not rated (Table 2) which again highlights the importance of our in-house credit research team and in-house credit rating. This also enables us to consider opportunities that otherwise would not be possible.
altii: Are institutional investors allowed to invest and how is the treatment under Solvency II?
Perin: Our UCITS compliant open-ended funds are available for both institutional and retail investors. The daily liquidity adds more flexibility and facilitates funds’ subscriptions. Another advantage of such instrument is its cost relating to Solvency Capital Requirements, within the Solvency II regulatory framework. Convertible bonds stand for a lower regulatory cost versus equities, while offering similar returns making such investments very appealing.
As a result, the asset class sees growing attractiveness among institutional investors and increasing inflows. In parallel, the primary market has been very dynamic both in terms of volume of new issues and the number of issuers. This activity has led to a better diversified sector and country distribution.
altii: What differentiates your strategy technically from others?
Perin: As previously discussed, convertible bonds are a multi-component asset class, combining various features - equities, bonds, credit, implied volatility, and prospectus clause. These alpha drivers often move in different directions and benefit from different market cycles. Consequently, depending on the momentum, some would generate positive performance while others would “destroy” alpha.
That is why we launched our GIS Absolute Return Convertible Bonds fund with the ability to hedge the unwanted parameters and therefore optimize the alpha drivers. Combining a long only strategy with hedging/arbitrage techniques allows investors to isolate and exploit various strategies. In our view and in the context of the current market conditions it is extremely important to have a certain degree of flexibility.
Lastly, an absolute return investment approach applied to convertible bonds fund allow us to add arbitrage techniques only used by some hedge funds, in a transparent, rigorous and risk-managed UCITS structure.
altii: The market has size but who are the issuers of convertible bonds? Is the market diversified?
Perin: By today the range of sectors is more diversified than it used to be in the past (Table 3). The banking system is currently underweighted and the real estate sector has a tendency to be over weighted. In terms of notionals, the range is wide going from small caps to very large caps with jumbo deals up to 2 billion and with names like Airbus and Telecom Italia. Within the current market conditions issuers can enter the market with a very low or a zero coupon and sometimes even with negative yields (true for certain investment grade names). Having said that, we estimate that the market is large enough, allowing us to be selective in our security picking. In addition, our absolute mandate approach gives us the opportunity to hedge parameters in order to focus on the ones we would like to isolate.
Table 3: Global market sector breakdown. Source: Barclays Bank
altii: What happens to a convertible bond if the issuer is taken over in a mergers and acquisition (M&A)?
Perin: Most issuances include a prospectus clause called the ratchet mechanism. In the event of an M&A situation the investor would lose the value of the optionality at one moment. The ratchet mechanism compensates the premium paid at issuance and could be a potential alpha source in case of a takeover. The attractiveness of these clauses depends on the level of delta/ underlying equity, the residual maturity and the implied credit spread.
altii: Is your fund actually limited to the UCITS vehicle?
Perin: The UCITS framework was chosen since most investors are comfortable with and already using such regulatory standard. We are nevertheless flexible to offer investors other vehicles, e.g. Spezialfonds or managed account solutions. Of course the legal structure should be chosen in a way that the requirements of the investors are fulfilled and that our trading purposes are matched. Given the fact that our approach is straight forward solving this equation should be simple.
altii: Thank you.
About Generali Investments:
Generali Investments, the main Generali Group asset manager, offers a broad choice of personalised investment solutions for institutional and private clients, ranging from institutional mandates to mutual funds.
With approximately €375 billion of assets under management as of end of June 2015, Generali Investments is one of the largest asset managers in Europe. The company has developed proven expertise in multi-asset portfolio management, adopting a method based on research and a prudent risk approach to protect invested capital and deliver stable long-term yields.