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Investors split on role of convertible bonds

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New research¹ from NN Investment Partners shows investors are split on the types of financial markets in which they believe convertibles will flourish. The most (39 per cent) said flat markets are ideal while 34 per cent cited bear markets and 23 per cent bull markets.

The research also shows that while the most investors (39 per cent) thought convertibles should sit in the fixed income portion of a portfolio, 30 per cent thought they should be considered as an ‘alternatives’ allocation and 10 per cent as equities, while 21 per cent thought they should be considered to be an asset class in their own right.
 
Tarek Saber, Lead Portfolio Manager, NN (L) Global Convertible Opportunities fund, says: “We were quite surprised by the differences in opinions about convertible bonds (CBs). It is still an unfamiliar asset class to some and in many respects some degree of education needs to be implemented to help investors feel comfortable  with the role CBs can play in their portfolios.”
 
“A key point to understand about (CBs) is that they provide equity-participation – around 90 per cent correlation to equities but with around half the volatility. So they do well in equity rallies but when these falter the benefits of the fixed income element come into play. Allocating between 3 per cent and 10 per cent of portfolios to convertibles can certainly enhance the risk-adjusted returns.”
 
The NN (L) Global Convertible Opportunities fund has a focused approach. Its managers identify themes they believe will be value drivers  for certain stocks to perform, whatever market conditions, and target the most attractively structured CBs accordingly. This approach allows NN IP to express top-down views more accurately than a traditional sectoral approach, as sectors often have a very dispersed set of return drivers.
 
The fund, which has more than USD 275 million in assets under management2, was awarded a five-star rating from Morningstar in October, based on its three-year track record. It has delivered a return of 4.36 per cent and 10.83 per cent over one and three years respectively to 8th October 2015.
 
NN Investment Partners’ fixed income boutiques have experienced management teams consisting of portfolio managers, analysts and strategists. These dedicated teams have a global presence with locations in The Hague, New York, London and Singapore. With a proven proprietary investment process, the award-winning investment team’s experience and expertise is combined with a client-centric process that forges a partnership with customers to help them meet their investment needs through a platform of innovative products.

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