The promising start for Sparinvest Global Convertible Bonds bodes well for the strategy and future performance.
In the 15 months since launch, the fund has returned 10.9 percent gross, 1.2 percent ahead of benchmark and 2.9 percent ahead of peers in the global convertible landscape.* With more than EUR 96 million under management, up from EUR 50 million at the start of the year, the multi-factor strategy has already reached a good critical mass.
Unique strategy in the convertible space
- the best of two worlds
Convertible bonds are corporate bonds with an embedded option to convert the bond into stocks at the discretion of the investor. If the stock price rises, the con-vertible will take part in the appreciation. If the stock prices falls, the convertible will trade like a regular bond. The com-bination of safety from the bond element and upside potential from the stock element has done well for convertible bond investors over time. Historical re-turns have been very attractive compared to both stocks and corporate bonds, both in absolute terms and on a risk-adjusted basis.
The fund employs a market neutral multi-factor strategy utilizing academically proven factor premia. Sparinvest has been an early adopter in factor investing and hence built extensive knowledge and experience in the field.
The convertible bond strategy builds upon this knowledge with a strategy that is neutral on regions and sectors while tilted towards four factors; low leverage, value, small cap and low volatility. Individually, the factors have long-term return premia but with some short-term volatility. Combining the factors in a multi-factor strategy provides a more stable return profile with lower volatility.
Potential for even better performance
Fluctuations around a long-term positive trend means that investors can face flat or declining factor premia in the short term as seen since launch where the four factors utilized in the convertible bond strategy have delivered minor negative premia, except for small cap that has had a small positive premium.
However, it is very encouraging that we have managed to outperform our gross benchmark and are well ahead of our peers*, considering the negligible contribution from our factor exposures.
Looking forward, there is even greater potential once factor premia turns our way. We are therefore very optimistic about future performance and expect to improve our position based on the long-term trend in factor premia.
Factor Premia - harvesting market anomalies
It is a fact that you as an investor have been able to outperform the general stock market by investing in certain “styles” or “factors”. This fact of anomalies is proven in academic literature, numerous articles and empirical studies. The most well known factor is “value” where you invest in the cheapest stocks based on different price multiples. Other factors are low vola-tility, small cap, momentum and quality. The reasons behind the outperformance (or premium) is an exciting topic primarily debated by two schools. One is based on risk, arguing that factor premia are a result of higher risk. The other school is based on behavioral finance where factor premia are explained by inefficiencies in the market such as overreactions and herd behavior.
Opportune time to enter convertible bonds, strategically and tactically
Convertible bonds can improve and strengthen a diversified portfolio due to its correlations to other asset classes and attrac-tive risk-adjusted returns. In that sense, any time is an opportune time to enter convertible bonds for the long-sighted strategic investor.
For the tactical investor, the outlook of rising rates and high valuations on the stock market makes an opportune entry point for convertible bonds utilizing its unique characteristics. Compared to other bond classes, convertible bonds has the lowest interest rate sensitivity and is therefore favorable in times of rising rates. In times of rising rates, convertible bonds tend to outperform both investment grade and high yield bonds. Compared to stocks, convertible bonds have significantly lower risk, both in terms of historical drawdowns, time to recover and volatility. Additionally, convertible bonds have an asymmetric profile having more upside than downside participation relative to stocks.
*Source: Bloomberg, Thomson Reuters, Sparinvest and Morningstar. The fund was launched on August 31 2016. Return as of November 30 2017. Gross return is 1.2 percent ahead of benchmark (Thomson Reuters Global Convertible Bond Index (EUR hedged)). Net return (retail share class) is 2.9 percent ahead of Morningstar category of Global Convertible Bond funds EUR hedged