Time to reconsider convex assets

10 October 2018

Cédric Daras

RAM (Lux) Tactical Funds - Convertibles Europe


In the absence of major information from companies, the market was driven by macro highlights.   After the fear of a trade war escalation at the beginning of the month, the market has been nearly reassured by the new tariff announcement of a raise by 10 points (lower than expected) on USD200bn of imports products coming from China.

In addition, the U.S. economy continues showing strong figures, and as largely expected by the market, the Fed increased interest rates by 25 bps to 2.25%. In Europe, Draghi reconfirmed the ECB's confidence on the economic outlook. All in all, this background was positive for risky asset and put some pressure on government yields on both side of the Atlantic (+15bps for the 10Yr Bund and + 20 bps for The T-note). Elsewhere Italy’s updated Stability Program surprised most market participants on the downside, with a larger-than-expected 2019 projected fiscal deficit of 2.4%, thus plunging risky asset in the red. The sell-off negatively impacted the banking sector with the 10Yr spread between BTP and Bunds widened by 30 bps during the last two day of the month - offsetting 2/3 of the tightening previously initiated.

Finally the European equity market ended September in negative territory; -0.21% for the Euro Stoxx Total Return – Insurance, Oil &Gas and Banks outperformed the market while Real Estate, Technology and Food & beverage underperformed. We can also note an underperformance of mid and small caps vs large caps – respectively -0.90% for Euro Stoxx Mid Total Return and -1.10% for Euro Stoxx Total Return.

On the corporate bonds side, the European High grade market posted a negative return (-0.29% for the BofA Merrill Lynch Euro Corporate Index), while the High Yield segment generated a positive (+ 0.28% for the BofA Merrill Lynch Euro High Yield Index). Despite the increase of volatility on risky assets, the Subordinated Financials sector was the main positive contributor for investment grade where spreads tightened by 9bps, while Technology was the main negative with spreads widening by 2bps. On the high yield segment, the Consumer Staples sector outperformed the market- spreads tightened by 67 bps- while the Industrials sector underperformed – spreads widened by 41 bps.

Convertibles market

Over the month, convertible bonds posted a negative performance of -0.24% as illustrated by the ECI Europe Index and a negative performance – 0.04% for the ECI Euro Index.

On the technical side, implied volatilities have pursued their rebound- +1.2 points- to stand at 29.2%. Over the period, the spread of implied volatility between convertible and listed options have widened by 0.5 points to reach 7.5 points.

The primary market has been calm in September with 1.5 Bn€ of new convertible bonds. Adidas issued 500m€ (5Y, yield -0.73%), SGL Carbon 160m€ (5Y, yield +3%), European TopSoho 250 m€ in SMCP (3Y, yield +4%) and a fourth convertible RAG in Evonik 500m€  (6Y, yield -0.08%) - Korian and Glencore both tapped market (respectively +60 m€ and +125 m$). We did not participate to these issues, as we do not see any value.


In September the INp EUR Class of RAM (Lux) Tactical Funds- Convertibles Europe Fund delivered a net performance of -0.15%*, representing an outperformance of 9bps versus its benchmark (Exane ECI Europe).

Over the month the stock picking has been a positive contributor relative to the ECI Europe. The Fund benefitted from its underweight on Technology ( STM, AMS) and Real Estate (Deustch Wohnen), and its overweight on Materials (Buzzi Unicem, Aperam, Arcelor). Conversely, the Fund suffered from its underweight on Marine Harvest and its position on WPP. The low duration compared to the index has also been a positive contributor this month.

We have taken some profit on Safran 2020 following the good performance of the stock, and we have reduced our position on AAbar/Unicredit. On the other hand we have increased on position on Buzzi Unicem and STM, and Carrefour.


Top Contributors of the Month 

RAM Convertibles EU: Positive Monthly Contributors

RAM Convertibles EU: NegativeMonthly Contributors

*Sources : RAM Active Investments