Bonds
have come in for a rough ride of late, but convertible bonds
may provide a solution
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The
bond market has been put on the back shelf in recent months
as equity markets continue to nudge a little further. However,
there are still opportunities for the bond investor out
there and Jacque Joakmides believes that his fund, the Fortis
L Fund Bond Convertible Europe, is one that is still proving
attractive due to its lack of correlation to traditional
bonds.
The
fund invests in convertible bonds denominated in European
currencies and focuses on mixed convertibles. This means
that depending on the ratio between the equity price and
the conversion price the convertible bond can perform like
a bond (higher conversion price and lower equity price)
or like an equity (equity price close to conversion price).
Joakmides says: “Our focus lies between the two. Mixed
convertible bonds are more sensitive to upward stock movements
than downward stock movements.”
This
is highlighted by an Ibbotson Associates study which shows
that between 1973 and 2002 US convertible bonds participated
in 70 per cent of upward equity market and only 53 per cent
of the downside. Kris Deblander, co-manager of the fund,
says: “And these figures reflect the asset class as
a whole; mixed convertibles even do slightly better.”
Over this period US convertible bonds made gains of 10.6
per cent, compared to 9.3 per cent for corporate bonds.
Both
managers believe that, compared with a simple 50/50 European
equity/government bond split, by reducing the proportion
of equities and bonds by 20 per cent and replacing these
with convertibles, returns would improve by 8–8.6
per cent, also reducing risk from 8.86 to 8.84 per cent.
The
fund has already surpassed its objective of posting an average
outperformance of 3 per cent against the GSBB Convertible
Index. By September a return of 8.5 per cent had been generated,
against an increase in the index of 4.7 per cent. Noticeably
equities would only have returned a fraction more at 8.6
per cent following the MSCI Europe index.
Joakmides says: “Even in times of falling bond markets,
convertibles, in contrast to traditional bonds, are still
attractive assets.”
