CONVERTIBLES IN INSTITUTIONAL PORTFOLIOS: WHERE DO THEY FIT?
We would argue that convertibles belong in the same “bucket” as long/short (L/S) equity hedge funds, for the following reasons: …read more
CASE FOR CONVERTIBLES: The Strategic and Tactical Argument for the Asset Class
Ultra-easy monetary policy across the developed world has driven up the valuation of the entire spectrum of risk assets, driving down prospective returns. It is becoming increasingly challenging for institutional players such as pension plans, insurance companies and endowments to attain their unrealistically high return targets without exceeding their risk budgets. Asset allocators face a Hobson's choice between highly inflated high quality fixed income that is quite vulnerable to interest rate risk, equities that may be attractive on relative valuation based on equity risk premium but are at fairly elevated absolute valuations, and alternatives that have failed to generate alpha on a sustained basis.
To compound the issue, both monetary and fiscal policy are approaching an inflection point. Resilience to potentially rising volatility and a gradual creep up in rates is likely to become an overriding consideration for asset allocators. The white paper examines this macro landscape and evaluates the ability of convertibles as an asset class to provide a solution.
Convertibles seem ideally placed to meet the challenges of the current macroeconomic environment. They provide the ability to capture the equity markets relatively higher long term returns just when institutional investors are struggling to meet return targets. They are able to do so while mitigating downside risk and drawdowns. Additionally the embedded equity option in convertibles becomes more valuable as rates rise and volatility rises from depressed levels. Finally they have much more muted sensitivity to interest rate risk than fixed income at a time when such risks are elevated…read more
For 2016, strong underlying equity performance was a major driver of convertible total returns, as was massive spread tightening particularly in the lower grade credits. As such, the equity-sensitive and credit sensitive portions of the convertible universe outperformed traditional balanced, convex convertibles, a rare occurrence in an asset class where the balanced convex zone typically represents the best risk-reward tradeoff…read more
Associate Portfolio Manager
Ravi Malik, CFA
A 60% stock / 40% bond portfolio has been generally accepted as the standard allocation for many decades. For the most part, it has served the investment community well as solid gains from its widely used benchmarks, the S&P 500 and the Barclays US Aggregate Bond Index (“AGG”), resulted in the 60/40 model outperforming most mutual funds and hedge funds. However, as we look forward, there are several challenges facing the traditional 60/40 model. In fact, its risk/return profile is likely to be less attractive than several other portfolio structures…read more
Steve Wachtel, CFA
Looking Beyond the 60/40 Portfolio
In an environment of rising rates and stock prices, like the one we’re currently in, convertibles help minimize downside risk while participating in the upside of the stock market. Ravi Malik, SSI’s Senior Portfolio Manager, walks investors through the details of convertible strategies and their significant diversification benefits for both stock and bond investors…read more