After two years of extraordinary returns, both positive and negative, convertibles are now back to their pre-Lehman crisis valuation levels. So where next for the sector?
AAA-rated Dr Gerhard Kratochwil from specialist convertible bond boutique, Convertinvest, says the levels of losses and returns which convertibles investors have seen in the last couple of years will probably not be seen again, but that the sector does face higher volatility than in the years before the crisis. This makes it a necessity for fund managers like him to react quickly to market changes, he thinks.
Kratochwil, who runs the Convertinvest European Convertible & Bond Fund and Convertinvest All-Cap Convertibles funds is enthusiastic about the number of new issues coming to the market in recent months and thinks the market is undervalued.
His absolute return approach, which has seen his flagship fund outperform consistently with significantly lower volatility than its index, puts an emphasis on the fixed income part of the hybrid instruments, but looks to benefit from positive equity markets while largely avoiding equity downside. He says this is in response to institutional investors in Europe which treat convertibles as part of their fixed income exposure, unlike their US counterparts who invest in converts for their equity characteristics.
Kratochwil is ranked top out of 36 managers in the European convertibles sector over five years, having returned 34.1% while the average manager has returned just 16%.