How to get the alpha/risk balance right with convertible bonds

CONVERTIBLE BONDS

The recent collapse of a €200mn convertible bond issued by Banco Espirito Santo's parent company rocked the convertibles market. Marc Basselier, manager of the AXA Framlington Global Convertibles fund, asks if the fundamentals still stack up.

Convertible bonds’ investment performance is primarily driven by equity market performance. During equity bull markets, it is expected that the return of convertible bonds will be highly correlated with the market, on account on the embedded equity option. However, during equity bear markets, the returns take on a more bond-like profile and are therefore less correlated with the equity market. Although convertibles underperform global equities on the upside, they outperform on the downside and thus they have the potential to deliver an attractive return with less overall volatility. C...