Convertible bonds are similar in many ways to standard corporate bonds. They have all the typical features of debt instruments. The difference is that they give investors the option of exchanging the bond for a predetermined number of shares.
A convertible bond is seen as an investment with a fixed-income risk profile, yet it gives the investor the opportunity to gain exposure to another security (an equity), with the potential for greater returns.
Convertible bonds have historically offered investors equity-type returns with bond-like risk. Convertible bond issuers are ready to compensate investors in exchange for the extra flexibility offered by the instrument. Currently, the convertible bonds universe offers an attractive mix of yield and equity exposure.
Convertibles are the asset class of choice at this point of the investment cycle. They are an attractive way for investors to gain exposure to a prolonged market recovery with lower risk than equities. We believe convertible bonds deserve a place in a diversified asset allocation strategy.