Convertible Bond Market Update

Martin Haycock – New Capital Client Portfolio Manager

A short update on the convertible bond market following the recent global market volatility:

Drawdown event – convertibles provided downside mitigation

• From the market peak on 16 July, the MSCI World (USD hedged) fell 9% - see chart below.
• Meanwhile, an equity (or “parity”) index made up of convertible bond benchmark index underlying shares fell 10%.
• In contrast, the benchmark FTSE Global Focus Convertible Bond Index fell just 3.8%.
• Once again, the bond component of convertibles helped mitigate drawdowns versus equities.

Bounceback opportunity – further upside potential for convertibles

• From the lows of 5 August, the MSCI has gained 8%, with convertible bond underlying shares (“parity”) lagging at +7%.
• If equity mean reversion is expected, there may be scope for further upside from convertible bond underlying shares.
• In addition, we believe convertible bonds are currently trading cheap to their theoretical value.
• This provides a further source of convertible bond market upside potential.

New Capital Global Convertible Bond Fund – well-positioned

• The Fund has a slightly higher equity sensitivity than the benchmark FTSE Global Focus Index.
• While it meant a slightly larger drawdown, it means the Fund has bounced back faster than the benchmark.
• Further, the Fund has proven greater capture of upside markets than declines to the downside (“convexity” *).

Source: FTSE, Bloomberg (all data as of 20 August 2024)

Convertible bonds can play a useful role as a complementary asset class within a client allocation. The recent market volatility serves as a reminder of the benefits of convertibles in mitigating drawdowns while retaining further equity market upside potential.

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