Commentaries

12 June 2019

Olivier Mulin

RAM (Lux) Tactical Funds - Convertibles Europe

Stock markets have been weakening in May as many investors became increasingly nervous following the unexpected deterioration in trade talks between the U.S. and China. Indeed, the recent equity rally was mainly driven by multiple expansion, so the long-term consequences of a damaged bilateral relationship was a pretext to reduce risks. Amid this context, defensive sectors (Real Estate and Utilities) outperformed cyclical sectors (Basic Resources, Banks and Auto). Spreads have widened on the European credit market, while the high yield segment underperformed high grade. The German 10YR yield pursued its decline to reach -0.21%. 

The PI EUR Class of the RAM (Lux) Tactical Funds - Convertibles Europe Fund delivered a net performance of -1.85% in May, representing an underperformance of 71 bps versus its benchmark (Exane ECI Europe). The Fund suffered from its underweights across Real Estate, Communications Services (Cellnex) and Consumer Discretionary (Adidas). On the other hand, the underweight on the Information Technologies sector (STM) was a positive contributor.
The primary market woke up slightly with three new convertible issues: 150m€ of Biocartis 4% 2024, 330m€ of GN Store Nord 0% 2024 and 500m€ of Orpea 0.375% 2027. We shunned the two first issues, but we participated to Orpea. JPM issued 400m€ of a cash settled exchangeable into Siemens 0% 2022. As the bond appears expensive, we continue to favour an exposure on Siemens through listed options.

The convertibles market was marked by the Rallye credit event. We were never involved in this name for fundamental reasons.
On the technical side, implied volatilities declined slightly by 0.6 point to reach 28.8%, while the spreads of implied volatility between convertible bonds and listed options tightened by 1.8 points to reach 4.7 points.  

*Sources : RAM Active Investments