Arguments in favour of convertibles grow stronger
Fisch Asset Management’s Klaus Göggelmann believes convertible bonds may yet become more attractive as the benign climate for plain bonds fades.
In theory, convertible bonds should outperform plain bonds as there is the potential upside of shares. Yet like the latter, they should be less volatile than shares because holders receive income payments.
But over the very long term this has not happened. Convertibles beat plain bonds since 1996, making 6.17% a year compared to 5.45%. They also beat equities, as sharp swings on share markets left weary shareholders up just 4.77% per year.
The high volatility of shares, as markets moved from boom (1997-2000) to bust (2000-02, 2008 and 2011) meant that as expected, convertibles were significantly less volatile than equities (11.56% against 15.7%).
Where to now? Few would doubt shares’ outlook remains uncertain over the short term at least. Macro-driven ‘relief rallies’ have often been quickly followed by politically-inspired sharp falls. Few managers believe this will change soon.
Therefore, it is reasonable to believe convertibles might remain less volatile than equities, says Klaus Göggelmann, senior portfolio manager at Fisch Asset Management.
Avoiding a ‘lost decade’
The Swiss management house runs €3.5bn in convertibles via three strategies (Defensive, Opportunistic, and Absolute Return), as well as outsourced mandates for clients including Schroders, Liechtensteiner Landesbank, Bayern Invest and Sarasin, and separate institutional accounts.
Fisch’s Defensive fund is mainly investment grade bonds and is “not so aggressive on the equity side”. Its Absolute Return fund is “even more defensive”, targeting gains over one to two years. Opportunistic resembles an equity investment style with higher risk and a trading style, including high-yield paper.
Göggelmann says it is doubtful the “perfect scenario” bonds have experienced over the past years will continue.
“We could be facing a ‘lost decade’ for the bond market, in which case it is really interesting to have something that has characteristics like the convertible market with limited downside, but also the upside of equities. Risks today are very high. From that perspective, the asymmetry in a convertible bond is very interesting for investors.”
He adds that the strong influence political factors are exerting on markets means traditional models are of limited use in guiding decisions. “Models are unusable in these markets – or at least they are not able to cover what is going on, because politics is driving it and that is not included in models. These days, it is [about] everything going on in Europe or the US.”