The case for global convertibles in the new YFYS regulatory environment

The global pandemic created uncertainty in markets. With many investors on edge, the defensive qualities and equity risk exposure of convertible bonds proved particularly attractive. Our global convertibles team look at the market outlook and examine the specific characteristics of the asset class.

After the excellent performance of the asset class in 2020, with relative outperformance compared to other risk asset classes including equities and credit, we continue to see a positive market backdrop for convertible bonds. This is despite the recent valuation compression across the investable universe following record issuance in the last twelve months. While the extent of the relative success may have been extraordinary, and may not be repeated every year or throughout an economic cycle, there is a compelling case for convertible bonds to continue their equity-like returns with significantly reduced volatility.

The natural asymmetry of convertible bonds make them well equipped for a wide range of scenarios. In our view, the unique characteristics of balanced convertible bond portfolios, particularly when actively managed in an unconstrained investment approach, remain an attractive investment proposition that is well-equipped for the current volatile and uncertain market environment.

The paper covers:

  • The market context
  • The natural asymmetry of the asset class
  • The role of convertibles as a low-volatility alternative to equities
  • Diversification
  • The benefits of active management

Past performance is not indicative of future results. Client outcomes are not guaranteed.

Key risks

The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

Convertible bonds can earn less income than comparable debt securities and less growth than comparable equity securities, and carry a high level of risk.

Bond values are affected by changes in interest rates and the bond issuer’s creditworthiness.

Bonds that offer the potential for a higher income typically have a greater risk of default.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.

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