NN IP is as positive on convertibles as five years ago

Investors in convertible bonds have the odds skewed in their favour, providing they do their credit homework, according to Jasper van Ingen, Senior Portfolio Manager Convertible Bonds and co-manager of the $790 million NN (L) Global Convertible Opportunities fund (GCO).

The fund made a 45% return after fees during its five years since inception, an outperformance of over 10% versus its benchmark¹. NN Investment Partners (NN IP) believes that in current market conditions, the asset class should be able to deliver an annual return of 4-5%. GCO aims for an annual outperformance of 2% above benchmark².

Jasper van Ingen, Senior Portfolio Manager Convertible Bonds at NN Investment Partners said: “We are as positive about the asset class as we were five years ago when we launched. Convertible bond investors are well-positioned to navigate volatile markets thanks to the asset class’s convexity; meaning that investors stand to benefit more from the upside of equity markets than to lose from a downturn of similar magnitude.”

Jasper van Ingen is still constructive about equity markets, as they provide further support for convertibles. Yet believes investors do need to be selective in order to achieve outperformance.

GCO selectively invests in around 40 convertible bonds, compared to the benchmark² of around 190 convertible bonds. The fund uses a theme-based framework, with long-term trends as a current focus.

We invest in 15-20 underlying themes which we believe are valid in the longer term and have a limited degree of correlation, ranging from infrastructure spending to changing diets and consumption. We also like themes such as cloud computing, clean energy, healthcare spending and global aging,” says Jasper van Ingen. “Our medium-term outlook for financial markets remains cautiously positive – in line with a maturing economic cycle. We believe that convertibles are a safer way to play equities going forward, while for fixed income investors convertible bonds provide a way to take some duration off the table.”

“In Europe, forward looking indicators look increasingly positive, and QE will continue to support risk asset valuations in the medium term. In the US, the expected growth rate of between 2% and 2.5% for 2017 can be achieved, although sustained rate hikes and major changes in legislation could spur volatility. And as for Japan, financial stimulus measures will continue to support risky asset valuations.”

The managers retain a degree of caution regarding convertible bonds issued in emerging markets, however. Jasper van Ingen commented: “We are underweight in emerging market-issued convertible bonds because of the level of transparency of some companies in these markets. We do maintain our exposure to these high-growth regions though, mainly through convertible bonds issued by companies in developed markets.”

Since inception, GCO has outperformed the most widely-used balanced convertible bond benchmark² by more than 10 per cent after fees. Jasper van Ingen concluded: “It is our conviction that the correlation between regional markets and asset classes will decrease as central banks limit the exuberant flow of “free money”. This will place greater emphasis on strategic allocation again. An asset class that functions as a bridge between bonds and equity is likely to do well in these circumstances, offering investors a natural ‘sweet spot’”.

NN (L) Global Convertible Opportunities is a sub-fund of NN (L) (SICAV), established in Luxembourg. NN (L) Global Convertible Opportunities is duly authorised by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg. Selected share classes of the sub-fund are currently notified in among others the Netherlands, Switzerland, United Kingdom, Italy, Norway, Chile, Singapore, Hungary and South Korea.