Managers cap convertibles,but opportunities remain

Convertible bond fund managers are united in seeing market opportunities, though divided on when they have enough assets to pursue them.

Convertible bond managers, a group that faced heavy redemptions and a 27% fall in the asset class in 2008, are capping funds now that strong inflows and market recovery have left some at near capacity.

Many who have not curbed inflows are considering it, citing the fear that excess assets will restrict returns and investment freedom. All say ‘soft closing’ portfolios is specific to funds.

F&C has capped its long-only Global Convertible Bond fund as its programme exceeded €2bn. RWC Partners is nearing capacity on its Global Convertibles fund, and Schroders has set limits – not yet reached – for its products, partly run by Switzerland’s Fisch Asset Management.

Phil Irvine, co-founder of London’s PiRho Investment Consulting, says investors should consider convertibles, as “a legitimate asset class dipping into equity beta, but with the promise of a bond floor.

Allocating forms part of a broader trend of investors saying they want participation in the equity market, but in a more risk-controlled way.”

Irvine cautions investors that they should bear in mind their own liquidity needs, and co-investors’ too, as the market can lose liquidity.

But not all managers have caps installed. CQS, which invests about $1.2bn in convertibles via co-mingled and bespoke products (both longonly and long/short), remains open, as do funds at Schroders and DWS Investments.

Christian Hille, lead portfolio manager of the DWS Invest Convertibles Fund, cites liquidity, average tradable sizes, new issuance activity and market coverage as key reasons to cap. But with €3.5bn in convertibles and a broadening universe, especially in Asia Pacific, Hille says he “does not see an issue with respect to capacity” under current conditions.

Capacity changes with market and liquidity environments, notes Dan Mannix, head of business development at RWC Partners.

“It is not simply the size of the fund you look at. One must consider as a fiduciary, in extremis, can you still meet redemptions? It is also about knowing your investor base. If you have, for example, lots of tactical asset allocators, it is prudent to assume in extremis they may be quicker to exit.”

RWC used a two-year hard lock effectively to curb inflows into its Distressed Convertibles Fund, and will close its $1.25bn Global Convertibles Fund at about $2bn.

Mannix says: “Capacity within convertible bond funds has to be very carefully managed. The liquidity of the asset class and size of the market are key considerations.

“In this asset class, there are a lot of smaller issues where you have to be a sensible size to take advantage of them, and for them to have a meaningful impact on your performance.

“The opportunity set by a convertible manager has got is capacityconstrained, and managers cannot perform well if they cannot access the best issues. If we managed $2.5bn or $3bn, we would not necessarily be able to access those effectively.”

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