The need to diversify will drive convertibles

Diversification, uncertainty about equity markets’ prospects and improved understanding of the asset class among investors will drive increased allocations to convertible bonds over the next three years, according to new research by NN Investment Partners.

Nearly three in five (57 percent) respondents expected institutions to raise their allocation to convertibles versus just 9 percent who expected them to cut it. A third (33 percent) expected exposure to remain the same.

The strongest reason for exposure to be increased to convertibles was a desire to diversify portfolios, with 59 percent citing this. Around one in five (18 percent) said it was because investors were unsure about the prospects for equities and another 18 percent said it was because investors were becoming more sophisticated and their understanding of convertible bonds had improved.

Tarek Saber, lead portfolio manager, NN (L) Global Convertible Opportunities fund: “Our research points to a greater acceptance among institutional investors of convertible bonds and their benefits. Investors are becoming more aware of the importance of using convertible bonds as part of their asset mix. Having between 3 percent – 10 percent in a portfolio should certainly improve its risk-adjusted returns.”

“Historically, convertible bonds have provided equity-like returns but with around half the volatility. They also provide a good diversifier to bond investments, with a negative correlation to sovereign bonds and very little correlation to investment grade credit. Normally, they offer a 90 percent correlation to equities and 60 percent to high yield.”