JPMAM: Convertibles are cheap now but valuations will rebound

J.P. Morgan Asset Management says investors should invest in convertibles while they offer such value, but not compromise on quality or diversification in chasing high yields.

Olivia Mayell, Client Portfolio Manager for convertibles at J.P. Morgan Asset Management said, "While prices appeared to hit a floor last October, value remains and convertibles still look very attractive by most historical measures, including yield, premium and volatility."

According to Mayell, despite the continued market environment and potential for more hedge fund sell-offs, there are still excellent buying opportunities at present, as well as very attractive yields. Over the second half of 2008, yields on convertibles rose to unprecedented levels, with yields to maturity on investment-grade issuance reaching well over 10% in October 2008 and, versus history, yields still remain high.

Mayell went on to explain the benefits, "Investors are being charged little or no premium for the in-built equity option in convertibles, meaning they are priced as cheaply as some bonds. In addition, current higher than average yields have lessened the need for many investors to take on leverage to achieve their target returns."

When looking at the short term opportunities, Mayell explains, "The market sell off last year provided bonds with high yields to maturity today but we also see fantastic opportunities in the primary market. In the last few months there have been very attractive new issues coming to the market and they have been in great demand from investors."

Mayell confirmed that investor inflows have been significant but that some investors may sacrifice quality to achieve exposure, "With some convertible bonds looking cheap across a wide range of measures it is unsurprising there have been large inflows, however, in our view liquidity, quality and global diversification are fundamental when looking to invest and should not be compromised over gaining exposure to the asset class."

J.P. Morgan Asset Management has assets of approximately USD$4 billion in convertible strategies.