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Convertible bonds are hybrid securities that allow investors to participate in the upside of equity performance when certain share price thresholds are met, while retaining the capital preservation characteristics of bonds if the option for equity conversion is not exercised.
Over the long-term convertibles have delivered similar results to equities with lower volatility and lower correlation to traditional asset classes, according to Evangelia Gkeka, London-based manager research analyst at Morningstar.
Like other asset classes, convertibles were also severely impacted in March by the global outbreak of the Covid-19 pandemic, Gkeka told FSA.
“However, during the second quarter, unprecedented levels of government stimulus and accommodative central bank policy helped bring liquidity and stability back to the market. We observed a record level of issuance in the second quarter, especially in the US, leading to total issuance of around $90bn in the first half – the highest level since 2007,” she said.
She explained that due to the economic lockdown, companies operating in severely impacted sectors, such as retail and airlines, raised capital and liquidity through the convertible bond market as it provided cheaper and quicker solution compared to the high yield market.
This represented around one-third of the new issuance, with the rest coming from companies that used convertible bonds to finance their growth plans, she added. These companies include those that are operating in the technology, sector and other growth sectors.
“After the March correction and despite the recovery in the second quarter, a lot of bonds are still trading at attractive prices and credit spreads. The record level of new issuance across different sectors and expected increase in corporate activity provides a rich opportunity set that allows managers to be selective,” she said.
Against this backdrop, FSA asked Gkeka to compare two convertible bond products: The Jupiter Global Convertibles Fund and the Schroder ISF Global Convertible Bonds Fund.
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|OCF (clean share class)