The rationale for convertible bonds late in equity-market cycles

Although convertibles have tended to outperform equities over longer time frames, the rationale for investing in them is especially compelling during the latter stages of market cycles.

Whereas convertibles suffered a decline equivalent to 62 per cent of the fall incurred by equity markets during the financial crisis, they enjoyed 80 per cent of the return generated by equities in the following five years. A similar pattern was seen during the market downturn of 2000-02, when convertibles fell 52 per cent as far as equities but then recovered 65 per cent as far.

This means for investors who fear equities are entering the latter stages of the cycle, a portfolio of balanced convertible bonds can provide a means to maintain exposure to equity markets while mitigating the risk of market declines.

Such asymmetry of the return profile of convertible bonds is explained by the fact that, while the call option embedded within them offers exposure to equities in rising markets, they also have bond-like characteristics. Essentially this means prices have the potential outperform underlying equities when stock markets are falling. And the fact that most convertibles have a relatively low duration means interest rate risk tends not to be a big driver of returns.

Key risks

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.

Convertible securities risk

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

Credit 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 (Aviva Investors) as at 28 January 2019. 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 document, 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 document is not a recommendation to sell or purchase any investment. In the UK & Europe this document has been prepared and issued by Aviva Investors Global Services Limited, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes.

Swiss investors: In Switzerland, this material is issued by Aviva Investors Schweiz GmbH, authorised by FINMA as a distributor of collective investment schemes.

 In Singapore, this document is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited for distribution to institutional investors only. Please note that Aviva Investors Asia Pte.

Limited does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia Pte. Limited in respect of any matters arising from, or in connection with, this document. Aviva Investors Asia Pte. Limited, a company incorporated under the laws of Singapore with registration number200813519W, 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 document is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd for distribution to wholesale investors only. Please note that Aviva Investors Pacific Pty Ltd does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Pacific Pty Ltd in respect of any matters arising from, or in connection with, this document. Aviva Investors Pacific Pty Ltd, 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

RA19/0126/31122019

Global convertibles

Offering the potential for uncorrelated returns, portfolio diversification and low volatility.

Find out more

Need more information?

For further information, please contact our investment sales team.

Contact us

Related views