Combining a Defensive Approach with Upside Potential Through Convertible Bonds

Convertible bonds combine the defensive qualities of straight bonds with the upside potential of equities, which gives them an asymmetric risk/return profile. This characteristic is a considerable advantage in the long term, as it enables this asset class to deliver equity-like performances with significantly lower volatility. The convexity of the asset class thus represents its main advantage and the reason clients add convertible bonds to their portfolios, as they provide an excellent way of diversifying a portfolio.

Union Bancaire Privée, having been an early believer in the many opportunities offered by the asset class, has been a forerunner in managing convertible bonds in Europe. The team has worked with a consistent approach to convertible bonds since 1999, basing its strategies on three key differentiating features that lie at the heart of its investment approach: an investment-grade bias, which strengthens the bond floor and reduces the overall credit risk; a focus on cheap options to maximise convexity; and discretionary delta management to quickly adapt the equity sensitivity, when needed.

The investment team is known for its long-term views, one of which is that they believe there is still strong value in Europe. The re-pricing movement that has been operating in the European convertible bond space, following the market dislocation in early 2012, is currently producing its positive effects in pushing European convertible bonds’ value upwards.

Through a set of distinctive convertible bond strategies primarily defined by clear equity sensitivity ranges, UBP provides an alternative to bonds and equities. The defensive strategy for example offers convertible bonds with low equity sensitivity as an alternative to bonds. The appealing long-term risk/return profile of the strategy, which places it in top-position in terms of size in Europe, is based on its positioning: by deliberately limiting the expected upside to equities it enables its holders to benefit from positive yields in a traditionally negative yield environment, strong asymmetry, as well as low volatility.

At the higher delta side of the convertible bond range, UBP’s dynamic European strategy has demonstrated its capacity to stand as a strong alternative to an investment in European equities. Its dynamic positioning – an equity sensitivity varying from 20% to 80% – combined with a pure bottom-up investment process focused on convexity have provided investors with an enhanced risk/return ratio over the long run, characterised by equity-like returns and contained volatility.

Fifteen years after the first strategy was launched by Jean-Edouard Reymond, the team of six manages about EUR 3.5 billion, making UBP one of the major players in the field. At the end of 2013, the dynamic European strategy had delivered a 15.3% gross performance, ranking in the 1st quartile of its peer group in terms of performance (on a 1- and 3-year basis).

• Business
• renta fija
• Global Fixed Income
• renta fija