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During the Corona crisis, many companies returned to convertible bonds (CBs) as a financing instrument, while others used them for the first time. This led to a boom in new issuance, which reached record levels in 2020 and continues almost unabated this year. "Investors are benefiting from this sharp increase in issuance activity, as the universe now includes more investment opportunities in previously underrepresented sectors such as airlines, and the travel and leisure industry", says Ute Heyward, senior portfolio manager at Fisch Asset Management in Zurich.
There are many reasons for convertible bonds’ attractiveness as a financial instrument for issuers, explains Heyward, who manages the FISCH Convertible Global Dynamic Fund: "During the coronavirus crisis many listed firms wanted to raise capital quickly and in a straightforward and cost-efficient manner. Convertible bonds fit the bill perfectly. This year, issuance has been boosted by rising interest rates, as issuers rush to lock in before prevailing rates move higher."
This means that new issuance is once again at a record pace in 2021. If it keeps up this momentum, it could even surpass last year’s extremely heavy volumes. As of the end of May, issuance amounted to USD 89 billion. This has made the universe even more diverse, and the Refinitiv Global Vanilla Convertible Bond Index now comprises more than 530 issues, the highest number in many years. Interestingly, about half of the recent new supply is from companies that are issuing CBs for the first time. Heyward explains, “This is good news for our portfolio, as it allows us as active managers to implement our market views even more precisely by virtue of the larger choice of different companies.”
A bright outlook thanks to central bank policies
Heyward views the current market environment as positive: “Expansive central bank policies are likely to continue to provide support, while fiscal stimulus should continue to drive the global economic recovery. We therefore expect equity markets to move higher, despite heightened volatility and the possibility of occasional setbacks, which, after all, would be normal, given the all-time highs that the major indices have reached.”
Higher volatility has made security selection even more important than it was before. “We are overweighting cyclical sectors, including industrials, which participate more strongly in the economic recovery, and companies that are benefiting from the easing in pandemic-related restrictions. Meanwhile, we took some profits on last year’s winners in various growth sectors, such as software and media & entertainment and are currently underweighting them. Nevertheless, we see opportunities in growth companies, as these should also be long-term beneficiaries of the change in consumer behaviour. Owing to the heightened level of volatility, we are increasingly investing in asymmetric CBs, which are widely available as a result of the issuing activities mentioned above. This allows us to both participate in rising share prices and mitigate losses as much as possible in the event of weaker markets", says the manager of the FISCH Convertible Global Dynamic Fund.
Third anniversary of the FISCH Convertible Global Dynamic Fund
On 31 May, the FISCH Convertible Global Dynamic Fund celebrated its three-year track record. It is one of Fisch’s five convertible bond funds and provides access to the firm’s most versatile strategy, which invests across the entire spectrum, from bond-like to equity-like profiles, without restrictions in terms of credit ratings. “That means we can deliver more flexible alpha generation to investors derived from the entire global convertible bond universe, in order to achieve long-term returns that are comparable to equities but with less risk”, Heyward says. The dynamic convertible bond strategy has around EUR 550 million in assets under management, and investors can choose between three currency tranches – EUR, USD und CHF.