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Commentaries

Convertible bonds: Resilient performance amid rising recession worries

30 August 2019

Olivier Mulin

RAM (Lux) Tactical Funds - Convertibles Europe

Market environment

August was a volatile month, as global geopolitics continue to dominate the news: The U.S.-China trade war still shows no sign of abating; Italy is facing a renewed period of uncertainty after its government collapsed; and the UK’s parliament shut down has increased the likelihood of a hard Brexit. Against this backdrop, the European stock market went down with an outperformance of defensive thematics.

On the government bond market, amid recessionary fears and trying to grab any yield, investors rushed into longer-dated bonds. Therefore, the U.S. treasury yield curve inverted in mid-August, for the first time in 12 years, and the German curve is near its flattest since the global financial crisis.

Regarding the Euro credit market, spreads continued to tighten with an outperformance from the high yield segment.

Portfolio commentary

The PI EUR Class of the RAM (Lux) Tactical Funds-Convertibles Europe saw a net underperformance of -51 bps vs the benchmark (Exane ECI Europe), delivering an overall performance of + 0.08% for the month. It is interesting to notice that the asset class performed better than its theorical sensitivity and posted a positive performance despite a decrease in underlying equities.

Relative to its benchmark, the headwinds came from both the convertible bonds’ selection (Carrefour, underweight in Mtu, Iberdrola and Cellnex Telecom) and from a negative forex effect, as illustrated by the strengthening of USD vs EUR (+1.3% with 23.9% of the total index denominated in USD). On the positive side, our underweight in LVMH and a lower exposure to the oil sector (BP, Technip) were an edge over the period.

On the technical side, the convertible bond implied volatility stayed still at 29%, with a spread with listed options at 5.1 points (-1.3 pts). No new issues were noticed over the month.

*Sources : RAM Active Investments