The M&G Global Convertibles Fund was launched on 13 July 2007. During the subsequent 10-year period, fund manager Léonard Vinville and his team have successfully navigated through what, at times, have been very turbulent waters.
- The M&G Global Convertibles Fund has navigated both rising and falling markets.
- Fund performance depended on the team’s ability to analyse credit, identify undervalued equities and assess the best technical characteristics of convertibles
- There are a number of reasons that suggest that convertibles remain well placed to perform well in the current investment environment
As is generally the case when a fund has been around for several years, the M&G Global Convertibles Fund has experienced both rising and falling markets. Soon after the fund launched, the global financial crisis began. Subsequently, valuations of convertibles came under massive pressure from the credit crunch and the demise of convertible arbitrage funds. A focus on convertibles with solid credit quality, as well as minimal exposure to bank-issued deals, cushioned the fund from the worst of the downward price movements. Governments and central banks then initiated stimulus measures to rebuild economies, leading to long-lasting rallies in the equity, bond and convertibles markets. The fund enjoyed strong performance as many of the convertibles held benefited from improvement in both their credit and equity profiles.
“By mid-2015, investors began to fear that slowing growth in China, allied to a collapse in the prices of oil and other commodities, could lead to global recession.”
Of course, it was not all one-way traffic and, in 2011, the European debt crisis led to some steep share price falls. Once again, the fund, and convertibles in general, were relatively insulated from the weakness, before participating in the recovery that followed the agreement of bailouts and more economic stimulus. By mid-2015, investors began to fear that slowing growth in China, allied to a collapse in the prices of oil and other commodities, could lead to global recession. Once again, the fund’s rigorous credit analysis process ensured that bond floors held firm, limiting price falls. As we approach the tenth anniversary, a synchronised global economic recovery seems to be taking place, boosting equities and those convertibles we have identified as giving a link to undervalued shares.
The strong past performance of the fund has depended on the team’s ability to analyse credit, identify undervalued equities and assess the best technical characteristics of convertibles. Thus, the fund has benefited from convertibles whose balance sheets are strong enough to give them robust bond floors, whose underlying shares have rallied, and whose risk/reward profiles have proved valuable.
A number of factors suggest that convertibles remain well placed to perform well in the current investment environment:
- Markets may not always be so calm
Many equity markets around the world remain close to record highs and, although the improving economy could encourage further rallies, there are growing concerns about high share price valuations. There are also many potential events that could unsettle investors and increase the volatility of asset prices. These include geopolitical concerns and ‘unconventional’ action from President Trump, as well as a change in policy form the world’s central banks – or, indeed, a ‘black swan’ incident that nobody had predicted. It is at times like this that the inherent volatility dampening qualities of convertibles can become particularly worthwhile.
- Well placed for rising interest rates
As other central banks seem to indicate that they might follow the US Federal Reserve and embark on an interest rate tightening cycle, it is worth noting that convertibles tend to do well when interest rates are rising. If stronger economic growth prompts higher borrowing costs then this should be reflected in higher equity prices, in which convertibles would participate. At the same time, the shorter duration of convertibles means that they should be better placed to withstand higher rates than other corporate bonds, which generally come under pressure as rates increase.
- Attractive relative to other assets
Almost all industry sectors and geographic regions are represented in the convertibles market, although some sectors and countries have larger weightings than others. It is possible to gain balanced exposure across both growth and value stocks, to technology-linked issues and more defensive companies. In our view, the many attractive investment opportunities in that can be unearthed in the convertibles universe should contribute to the asset class maintaining its healthy performance record.
The consistent investment process has delivered strong results in the first 10 years of the fund’s life. This approach, based on bottom-up stock selection, depends on rigorous analysis of credit, equity and technical characteristics to help the team select those convertibles they believe are most likely to generate asymmetric returns.
It is clearly impossible to predict what will take place over the next 10 years in global financial markets. Since no one knows what is going to happen, investors should consider the use of convertibles, which are likely to perform well over the long term, whatever comes to pass. Finding the right balance between credit and equity is the best way to deliver favourable returns over the long term.
Léonard Vinville is fund manager of the M&G Global Convertibles Fund
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