Converts: Too Rich or Just Right?

Chidem Kurdas

Making the rounds are two opposed views on convertible bond investing. Both appear to be backed by reasonable evidence but both can’t be right.

On one side are those who say this is the time to put money on convertibles. Thus John Calamos points out that in the 1970s, when interest rates went up and caused the bond market to crash while equities went sideways, convertibles were the best performing asset class.

The economic story that makes this relevant for today is that faster economic growth, rising inflation or a combination of the two will push up rates, which almost always causes bonds, especially longer duration bonds, to lose value.

Convertibles, hybrids of bonds and stocks, are of short duration. Also, the more closely a convertible’s price is connected to the stock into which it can be converted, the more it is protected against rises in interest rates.

Some investors, though, think convertible bonds are already too expensive and hence not a good idea right now. Aetos, a fund of funds manager, told its clients that it redeemed from a convertible manager because  opportunities are dwindling due to high valuations. Other fund of funds have done the same.

For their part, managers reject the idea that opportunities have disappeared. There is a lot of flexibility to achieve investment objectives, Mr. Calamos said. The chief executive of Calamos Investments, a major convertible fund manager, he was speaking at a Capital Link conference.

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One Response to “Converts: Too Rich or Just Right?”

  1. Waiting for Taper, Junk Beats Quality | HedgeFundSmarts Says:

    […] their combination of bond-like security with equity-like returns. Before the talk of taper started, opinion was divided on convertibles, one side seeing prices as too high. But this hybrid asset may be right under the current […]

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