"Focus on convertible bonds mixed"
April 11, 2010
Acropole Asset Management has a range made up exclusively of convertible bonds in Europe, Asia and worldwide.
Lefigaro.fr / jdf.com: In what context is conducive to investment in convertible bonds?
Emmanuel Martin: Growth in emerging countries is confirmed. In contrast, the macroeconomic environment remains uncertain in Europe because of concerns over the deficits of states. These two aspects reinforce the idea that convertible bonds are the investment most relevant, since they offer the best stocks and bonds.
Convertible bonds can collect a portion of the increase while offering a parachute in case of low *. In other words, their equity exposure increases as the stock rises. This is called the "convexity" of a convertible bond.In theory, it allows these assets to receive two thirds of the increase in shares and one third of the decline. Today, the proportions are 75% higher shares and 25% of the shares lower.
The persistence of macroeconomic uncertainty on the recovery and strength, as well as high levels of fiscal deficits states reinforces our policy has always been to balance the bond allocation and allocation shares.
These uncertainties related to the debts of European states do not they will encourage a return to high levels of volatility?
We face a paradox. Economists and managers are shared both between the positive numbers of Asian growth, and partly contradictory figures of the United States and concerns in Europe related to the Greek debt. However, the volatility index, VIX, is at the lowest (17% Ed).The downside is that this level is almost incompressible. The VIX is expected to increase again. In other words, market concerns about the financial situation of Greece are expected to materialize in the implied volatility. This will definitely be a welcome addition to investing in convertible bonds.
How should investors go about selecting their convertible bonds?
Investors will be more discriminating in selecting this year. In the absence of hedge funds, convertible valuations are widely dispersed, since these funds acted as arbitrators in pricing. Today, prices are largely determined by the funds based on their profile directional paris take on different actions. Hence the discrepancy between theoretical values and those found on the market.You should know that in Europe, directional funds represent 80% of the convertible bond market against 20% for hedge funds. Before the crisis, it was exactly the opposite.
Is this a good thing that hedge-fund will be partly removed from the convertible bond market?
It is an extraordinary opportunity for us to pick haircuts that did not exist before. Today, a convertible bond will tend to d?sench?rir phase of rising market. And, because of lower volatility. And vice versa. We find the typical behavior of a convertible with an increase in a market more volatile.
Take the example of Arcelor, which has issued convertible equity sensitivity was around 50%. Many investors have subscribed to the offer. Since then, Arcelor has been an exceptional course, which has boosted the sensitivity of the convertible to 90%.The directional funds and have reduced their position on Arcelor convertible bonds because it offered greater convexity payday loans.
Why did you choose a Joint Management ** rather than benchmarked?
This management allows investors to make the most of the convexity of convertible bonds, contrary to the management benchmarked which may tend to let themselves go and offer a sustainable sensibility that deviates from the zone of maximum convexity (50% Ed). To maintain equity sensitivity 50%, we conduct regular arbitrage between convertible bonds of our funds.
If sensitivity to the actions of a value exceeding 70% or falls below 20%, we go out of our portfolio.Even without a high volatility, we have managed to outperform the CAC 40 by 2.5 percentage points and the Euro Stoxx 4 points. When searching for a maximum convexity on our JMC, we captured the important movements of shares. In case of restructuring of sovereign debt and the return of volatility, we expect the movement of plus or minus 25% of the equity market.
What a holder of a convertible bond is it better protected than a holder of a share?
I do not understand why some investors are shareholders in companies with convertibles have a much more balanced profile than equity and therefore more suited to their expectations. It is not uncommon to find convertibles that have a 10% premium relative to shares, but the risk of loss is virtually nil.
I'll add that in a takeover, they would also be winners, if they held the convertible. He must know that after the crisis, investors have imposed on issuers of convertible adjustment clause, namely that a takeover, customers are often better protected than if they held shares. On the other hand, convertibles are usually adjusted when the company had to pay or increase its dividend. This clause has become a standard. If issuers do not comply, they will be more difficult to place their papers.
Which sectors do you build this year?
We have chosen to divert us from the management benchmarked. Therefore we will proceed cautiously across sectors.We'll focus on defensive stocks, pharmaceutical, food, telecom – far behind the cyclical values, but enjoying a strong capacity to admit to its customers prices and growth in emerging countries.
As for the cyclicals, we have a preference for the technology sector, including securities sectors semiconductor and software located at valuation levels very low, very low debt and whose profit margin is very high.
However, with regard to financial stocks, we have invested only in Italy or Portugal, because we believe that the technical characteristics of convertibles from countries such as France, Germany or the United Kingdom are not attractive enough . Anyway, convertibles are almost nonexistent in these countries, banks have enjoyed privileged access such state aid.But we believe they will come back.
* Technically, the convertible bonds not only provide a minimum annual return, called "coupon" as with any obligation, but also a right to subscribe for shares. The value of the latter depends on the Exchange. Through this mechanism, the convertible bonds capture a portion of the rise in the stock of the company that issued them.
** The JMC is based on the selection of bonds convertible to shares in sensitivities and obligations are 50%
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