Schroders sees convertible bonds as top performer in 2014 as global fund passes $2bn
Despite the current low growth, low interest rate economic cycle and likely risk of rates increasing in the US in 2014, Schroders believes there will be solid equity market performance and that convertible bonds are set to be one of the best performing fixed income asset classes this year.
Despite the current low growth, low interest rate economic cycle and likely risk of rates increasing in the US in 2014, Schroders believes there will be solid equity market performance and that convertible bonds are set to be one of the best performing fixed income asset classes this year. Schroder ISF1 Global Convertible Bond also recently celebrated passing $2bn2 of assets under management with strong performance over one year against the benchmark by returning 15.8%3 .
The strong case for global convertible bonds in 2014 is underpinned by the interest rate protection they offer, the strategic growth tilt and participation in the equity market via a long-term option, which is paired with strong credit selection. This provides investors with a balance of equity exposure and safety. Global convertible bond funds also offer diversification and protection benefits from local issues given their ability to invest broadly across regions and sectors. Some of the issues of 2013 though have made significant progress, for example the US debt ceiling and European banking regulation, which will continue to improve investor sentiment and drive market returns. However, there is some risk of volatility with market stress from the equity and credit side.
New issuances, which are crucial for sustaining a diversified convertible market and providing a good alpha source, are also likely to continue to be strong in 2014. The team is currently overweight cyclicals, such as industrials, as well as IT and consumer discretionary and is underweight financials and telecoms.
Dr Martin Kuehle, Investment Director, Convertible Bonds at Schroders, commented:
“Convertible bonds offer a solution to investors who do not have the risk appetite to buy equities or are constrained by regulation. While some investors have seen significant returns in the equity markets others have experienced this from the side lines hoping for a setback to finally get on board. We therefore forecast strong demand for convertibles either on a stand-alone basis or as a stable building block for fixed income portfolios.”
Philippe Lespinard, Co-Head of Fixed Income at Schroders, also commented:
“Surpassing the $2bn milestone is testament to the strength of our recently expanded convertibles team, which has also produced great performance for our clients. Market conditions are looking favourable for convertible bonds due to their low sensitivity to rising interest rates and exposure to high growth companies but with a defensive structure. They therefore offer an attractive investment opportunity for 2014.”
1 Schroder International Selection Fund is referred to as Schroder ISF
2 Schroders as at 3 January 2014
3 Schroders as at 31 December 2013 (A Acc, USD). Performance data is on a NAV to NAV basis, net income reinvested. Benchmark is UBS Convertible Global Focus (returned 13% over the same time period).
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