The enigma for me, is why CBs remain outside the peripheral vision of such a large number of institutional investors. I have always been puzzled by the lack of curiosity into the asset class, particularly when looking at its great historical performance, with one of the highest risk adjusted returns of any traditional asset classes.
No one can argue the portfolio diversification qualities that CBs do deliver.
It is being argued in many publications that I have recently read that CBs are expensive. I can make the argument that most traditional asset classes are expensive. The problem being is that on what measure are they overvalued when we are all in unchartered territory. My conundrum is defining overvalued?
CBs are an ideal vehicle to navigate through uncertainty with as they have performed well in numerous investment cycles, if we can just agree on a number of known uncertainties that we as investors face in 2016 and in no particu-lar order; we face new elections in the United States, potential currency volatilities/wars, Middle East tensions, oil/commodities volatility, rate rises/more QE. These are just some of the uncertainties that we are aware of, as usual it is the unknown events that will cause the most disruption.
CBs offer a bridge between fixed income and equity markets, they have performed well in rising interest rates environments in the past and they have also historically performed well in low yielding environments, as witnessed by what happened in Japan.
It is important to comprehend what CBs offer and what is the costs of holding a CB, when comparing comparable coupons to fixed income bonds. What you give up over the tenor is the differential between the coupon of straight bonds versus the coupon of CBs but it's always valuable to consider that what you are actually getting in return is a chance to participate in the underlying company's good fortune going forward. Owning CBs allows you to have equity-like participation with half of the volatility. In the event of there being a bear market you will be more bond-like and in the event that we have an equity rally you will have greater exposure to equities. Historically we have had arguably a 30 year bond market rally which was ended by US rates having been raised in December 2015, on the other hand some other potential market forces that I mentioned earlier on in this column could see us head back to where we have been in the recent past with further QE in Europe and potentially even a return to QE in the United States.
I am not trying to predict the outcome of equity markets or fixed income markets. CBs will be a powerful portfolio diversifier through these challenging economic cycles. I am not a believer in passive investing especially in the current environment; I believe you need to be selective in what you own. We have our investment philosophy that we should choose to invest in the best companies wherever they are, using CBs to express our underlying equity conviction after satisfying ourselves that both the credit element (capital preservation), the theme conviction (value drivers) and equity participation (CB structure) meet our strict criteria for disciplined investment approach. In that regard our New Year’s resolutions are a continuation of an All Years-plan to showcase the importance of CB’s in a diversified portfolio. As for investors: they might best view convertibles in terms of what contribution and improvement they can make to a portfolio as a whole. Because that’s what New Year’s resolutions are really all about: the commitment to improve.
The elements contained in this document have been prepared solely for the purpose of information and do not constitute an offer, in particular a prospectus or any invitation to treat, buy or sell any security or to participate in any trading strategy. This document is intended for press use only. While particular attention has been paid to the contents of this document, no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof. Any information given in this document may be subject to change or update without notice. Neither NN Investment Partners B.V., NN Investment Partners Holdings N.V. nor any other company or unit belonging to the NN Group, nor any of its officers, directors or employees can be held directly or indirectly liable or responsible with respect to the information and/or recommendations of any kind expressed herein. The information contained in this document cannot be understood as provision of investment services. If you wish to obtain investment services please contact our office for advice. Use of the information contained in this document is solely at your risk. Investment sustains risk. Please note that the value of your investment may rise or fall and also that past performance is not indicative of future results and shall in no event be deemed as such. This document is not intended and may not be used to solicit sales of investments or subscription of securities in countries where this is prohibited by the relevant authorities or legislation. Any claims arising out of or in connection with the terms and conditions of this disclaimer are governed by Dutch law.