Six good reasons to invest in Convertibles: Acropole AM
Paris-based Acropole Asset Management, which bases its investment philosophy and process on seeking out intrinsic value, offers six reasons why now it the time to look at “all-weather” Convertible bond
Reason 1: Equity markets remain uncertain
The string of crises (2008/2009 and 2011) has caused trends to intensify, as markets have swung between progressively wider extremes. Between June and September 2011, the main European stock market indices lost one third of their value. They have subsequently rallied strongly (Euro Stoxx 50 +15% since mid-September). Acropole Asset Management capitalised fully on the rally, having stepped up portfolio equity sensitivity at the end of last year. Acropole Convertibles Europe consequently returned a highly positive +9.2% in Q1 2012, compared to +6.9% for the Euro Stoxx 50. Even though the European Central Bank has reduced systemic risk by consolidating the banking sector over the next three years through massive liquidity injections, 2012 could nonetheless see the resurgence of a more traditional economic crisis. Another 30% mark-down certainly appears improbable, although the equity market is more likely to adopt a directionless roller-coaster profile rather than continue on a bullish trend. Based on this assumption, convertible portfolio management techniques will logically capture performance more easily than long-only equity investments.
Reason 2: Credit markets are expected to recover
Acropole Asset Management’s convertible portfolios are weighted in credit markets, which are still well below the 2011 highs seen prior to the sovereign debt crisis. There is still major upside potential, enhanced by positive repercussions from the 2008 crisis which imposed rigorous corporate financial discipline, forcing companies to focus on cash-flow generation whilst extending debt maturities and diversifying their financing sources. Despite recent concerns regarding corporate profitability trends, particularly in the US where current levels seem unsustainable amid sharply falling productivity, most companies can nonetheless boast very healthy balance sheets. As a result, the situation is fundamentally different from the 2002/2003 crisis.
Reason 3: Take advantage of an excessively low volatility
Volatility peaked during the summer and has now returned to very low levels. After surging to over 40 at the end of September 2011, S&P500 (VIX) volatility is currently close to 15 which would appear unsustainable. Acropole Asset Management’s convertible portfolios are structured to capitalise on any volatility uptick.