Spotlight shined on convertible bonds

According to Anja Eijking of F&C Netherlands, convertible bonds have been one of the best kept secrets of the investment world in recent years.

However, with rising interest rates, low returns on conventional corporate bonds and concerns rising about a potential correction in equity markets, Eijking, who manages the F&C Global Convertible Bond Fund, believes that convertibles can offer investors an attractive half-way house between bonds and equities.

In addition to flagging the attractions of the underlying asset class, F&C are poised to make their Global Convertible Bond Fund even more attractive to Dutch investors this week by introducing a new share class which will hedge the Fund's assets into Euros, thereby reducing currency risk.

F&C points out that for much of last year and the beginning of this year, bond markets have struggled in the shadow of the equity market rally with low yields on investment grade credits and leveraged takeovers threatening Credit. At the other end of the spectrum, default rates on high yield bonds have been so low that the general consensus points to them rising rather than falling from here. However, the bond market story could be at a turning point with bond yields rising significantly over the past few months. Eijking says this has put increasing pressure on equity markets where many investors still expect a general correction before the year end.

"10-year Dutch bond yields have increased from 3.9% at the end of March to around 4.7% today. At the same time equity markets have come under increasing pressure from concerns over US growth. However, although we agree there is some uncertainty in markets over the short term, we remain positive about the longer term outlook for financial assets, not least convertibles. The short duration of convertibles limits the potential impact of rising bond yields and rising equity market volatility should also prove beneficial," said Eijking.

According to Eijking, rising bond yields combined with higher share prices have recently led to an increase in issuance in the European convertible bond markets, whilst issuance within the US and Asia has been strong as well.

"With bond yields rising and convertibles offering on average a yield of just 1.5-2% on issuance, companies across Europe are turning to convertibles to raise finance," said Eijking."The truth is that no one can predict what will happen in six months time. Convertible bonds offer investors peace of mind by giving them security of income through regular bond coupons and the repayment of the fixed face value of the bond at the redemption date, regardless of any fall in the equity option. At the same time convertibles give investors unlimited upside exposure to equity market returns with the option to convert the bonds to shares on maturity.

"Convertibles have not been widely popular with private investors, many of whom rarely venture beyond the traditional asset classes of bonds and equities. Yet historically the long term risk/reward profile of convertibles has been superior. Indeed on an annualised basis, convertibles, which have a bond type risk profile have outperformed both equities and bonds over the last 10 years and their low correlation to both the equity and bond markets makes them an attractive addition to any portfolio," concluded Eijking.

Anja Eijking heads up a team of three fund managers and one portfolio analyst. Based in Amsterdam, the team manages 1.5bn across both pooled and segregated mandates. The F&C Global Convertible Bond Fund has consistently outperformed its benchmark, the UBS Global Focus Convertible Index, over 2, 3 and 4 years and in February won the accolade of best fund in the Lipper Germany awards' Global Convertibles category. The fund has also been given four stars by UK ratings agency Morningstar.