The lure of convertible bonds

Convertible bonds offer an attractive option in the prevailing economic environment, according to Tarek Saber, head of convertible bonds & lead portfolio manager convertible bonds at NN Investment Partners.

The upside of “safe” fixed income investments has become limited, while market volatility is making equity markets allocations too risky for many investors, he says.

Convertible bonds are corporate bonds that may be exchanged by the holder for a fixed number of ordinary shares, he explains. Convertibles increase in value alongside equities in rising markets, while being protected from the inevitable sharp declines. The value of the underlying bond thus provides a floor value and prevents the market price from falling with equities past a certain level, creating what he calls a bond-floor parachute. This makes convertibles a less painful way of participating in a company’s equity when things go wrong, he says. Moreover, convertibles have proven that they can perform in line with equities with much reduced volatility, he says.

Many companies limit their bond issues to convertibles, he observes. By excluding convertibles from their portfolios, bond investors in effect exclude these companies; conversely, convertibles can be seen as adding a dimension of diversification, he concludes.