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RWC Partners plans distressed convertibles fund

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RWC Partners is planning to launch a convertible bond fund in January to take advantage of pricing anomalies in the convertible bond asset class.

RWC Partners is planning to launch a convertible bond fund in January to take advantage of pricing anomalies in the convertible bond asset class. The RWC Distressed Convertibles Fund will aim to take advantage of the high return opportunity presented by the current undervaluation of global convertible bonds.

The new fund, which will sit alongside the existing RWC Global Convertibles Fund, will seek to achieve significant returns from the normalisation of distressed valuations currently available in the market following significant falls in convertible bond prices in recent months in line with declines in equity and credit markets.

Forced selling, predominantly by convertible arbitrage hedge funds, has placed additional downward pressure on prices. As a result of, convertible bonds have fallen dramatically and now offer compelling value relative to equities and equivalent straight bonds.

The RWC Distressed Convertibles is aimed at investors who can tolerate lower levels of liquidity. It will be long-only and invest in listed convertible bonds, holding them until the asset class normalises. The portfolio will be diversified across securities, sectors and geographies to mitigate credit risk. The fund will have no exposure to synthetic convertible bonds and will not use convertible arbitrage. The minimum investment is two years.

Miles Geldard (photo) will be lead portfolio manager, supported by Lee Manzi and Grant Webster, who have managed the RWC Global Convertibles Fund since its launch in early 2007. Their existing fund, a Ucits III Sicav, is seeing significant inflows in the current market, the firm says, taking its size to around GBP300m.

‘The forced selling in convertible bonds is providing a huge opportunity for investors who are prepared to tolerate low levels of liquidity to take advantage of distressed prices in the asset class,’ says RWC Partners chief executive Peter Harrison.

‘Convertibles are extremely cheap relative to other risk assets, with the implied default rates on convertibles as much as twice those of comparable straight debt. For example, 57 per cent of the convertible universe is now trading below bond floors.

‘In a low growth environment, where dividends may be cut, convertibles are a compelling alternative to equities. They are not subject to the same dilution risks and rank higher on the capital structure in the event of default.’

RWC Partners expects an actively managed portfolio of high-yield convertible bonds to generate significant returns from their current, oversold levels. The fund will have significantly more credit risk that the firm’s core Global Convertibles fund.

‘Although it is an extremely difficult time to raise assets, we are seeing strong inflows into our existing convertible bond fund,’ Harrison says. ‘For investors that can tolerate a two-year lock-up, we are confident that the illiquidity anomaly presents a great investment opportunity. It is prudent to ask investors to stay with the fund for two years to ensure that the fund’s liquidity is matched with the opportunities and risks in the asset class.

‘Miles and his investment team launched their core convertibles fund at the beginning of 2007 and, since then have demonstrated why they are considered to be among the best convertible bond investors around. The approach is one they have used for over a decade and is the ideal mechanism to maximise the potential from this compelling opportunity.’

RWC Partners is an independent asset manager founded in 2000 which currently manages USD2.3bn in a range of funds and institutional mandates, including the Global Convertibles and Strategic Reserve Ucits III funds, which were both launched in January 2007 and have more than USD900m in assets.

RWC Partners also manages three hedge funds, Pilgrim, is an Anglo-European long/short equity fund managed by John Innes and his team, Samsara, a pan-European equity long/short fund launched in September 2007 and managed by Ajay Gambhir, and Strategic Opportunities, launched in July 2007 and managed by Geldard and his team.

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