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Convertibles as an Asset Class - 2001 Update

01.02.2002

By Goldman Sachs Global Convertible Research (Scott Lange, Dan Sommers, Charles Seidler, et al.); February 21, 2002

A paper by Goldman Sachs summarizes Ibbotson Associates ' study and comes to the conclusion: Convertibles remain compelling in delivering returns that approach those of equities with much less volatility.

Conclusions

Convertibles continue to exhibit solid risk-adjusted returns

Updated Ibbotson analysis demonstrates that convertibles remain compelling in delivering returns that approach those of equities with much less volatility.

Convertibles continue to present a compelling risk/reward profile

Over the long term, convertibles have delivered 70% upside participation with equities and only 54% of the downside.

Sustainable drivers remain in place for continued strong long-run performance

Convertibles typically appear underpriced at issue, and we expect the unwinding of this undervaluation to continue to serve as a driver of strong long-term performance. Inefficient callability, whereby issuers rarely call their convertibles at the optimum moment, is also important in enhancing long-run performance relative to theoretical expectations.

Convertibles help optimize performance in fixed-income as well as equity portfolios

US Convertible performance has been fairly highly correlated with both large- and small-cap stocks, but much less correlated with the various fixed-income asset classes. This implies convertibles will provide particularly effective diversification in fixed-income-oriented portfolios.

Powerful new issuance growth continued in 2001

Despite difficult conditions in the US financial markets, US convertible issuance reached USD 104 billion in

2001, up a remarkable 70% from the previous year's record total. As we begin 2002, early indications point to a continuation of the strong new-issue calendar.

Convertibles as an Asset Class - 2001 Update

Conclusions

See also