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Asian convertible bonds are emerging as an enticing avenue for savvy investors as companies from around the world, faced with rising interest rates, are turning to the asset class as a cheaper financing tool over regular bonds.
Convertible bonds are essentially corporate bonds with the option for investors to convert them into equity shares. Despite the asset class providing lower yields than conventional bonds, it allows investors to benefit if the stock price of the issuer rises.
Meanwhile, of the approximately $500 bn global convertible bond market, Asian convertible bonds represent around $50 bn in market value. Historically, Asian convertibles have exhibited average downside participation of well below 50%, shielding investors from more than half of all equity market losses in Asia.
Also, convertible bonds in the continent, on average, show a loss of 3.7% as opposed to 8.2% for equities. Thus, due to its risk-averse nature, the asset class has recently gained a lot of attention from investors wanting to profit from China’s economic reopening.
“Convertible bonds are particularly attractive in volatile markets, as they can provide investors with exposure to the potential upside of an issuer’s stock price while limiting their downside risk. Additionally, convertible bonds can provide diversification benefits for investors, granting access to a range of different issuers and industries,” writes Dr Martin Kuehle, Investment Director, Convertible Bonds at Schroders.
“Over the past decade, investors have been able to generate equity-like performance with Asian convertible bonds,” he adds.
Why invest in Asian convertible bonds now?
A major reason for investing in Asian convertible bonds now is that it offers cheaper valuations in comparison to other bond markets, particularly those in the United States and Europe, as per Jefferies Group.
“Asian convertibles tend to trade cheap in valuation terms when we examine the value of a bond plus its embedded option versus its market value…We think that the benefit of this cheapness further enhances convexity as cheap bonds tend to trade closer to bond floors and closer to parity,” said investment company RedWheel.
“This essentially means that if underlying equities were to decline, the proximity to bond floor is high. A high bond floor provides a good level of capital preservation, while conversely if the underlying equity were to rise, participation to the upside would be strong,” the company added.
Also, the asset class appears to be a safer bet for companies with rising interest rates and a rebound in global equity markets after a poor show in 2022. Along these lines, the issuance of convertible bonds increased across Asia in the early part of this year, with companies ranging from Japan to Singapore and Taiwan entering the convertibles market.
Latest instances include Chinese video streaming company iQiyi selling five-year convertible bonds worth $600 mn in early March. While Wynn Macau offered six-year convertible bonds worth $600 mn to investors.
Asian convertible bond funds
With a rise in the issuance of Asian convertible bonds, here is a list of Asian convertible bond funds that investors could consider.
Schroder ISF Asian Convertible Bond C Accumulation USD
The Schroder ISF Asian Convertible Bond C Accumulation USD, which was launched in 2008, invests in a portfolio of convertible securities and other similar transferable securities, such as convertible preference securities, exchangeable bonds, or exchangeable medium-term notes, issued by corporate issuers in Asia excluding Japan. The fund is benchmarked against the Thomson Reuters Asia ex-Japan Hedged Convertible Bond Index.
As of February 9, 2023, the fund has an entry fee of 1% and ongoing charges of 0.94%. It is managed by fund managers Chris Richards and Peter Reinmuth. Reinmuth has 26 years of finance industry experience while Richards has been part of Schroder’s convertibles team since 2013. The fund had total assets under management of $91.75 mn.
In the last 10 years, the fund has given 42.5% returns. Along with that, the fund has risen 4.5% year-to-date as of June 30, 2023. All in all, it has a total of 51 holdings, with the top five being — Anllian Capital 0.0000 Conv 05/02/2025 Series Regs (6.51%), SK Hynix 1.7500 Conv 11/04/2030 Series Corp. (6.43%), Bharti Airtel 1.5000 Conv 17/02/2025 Series Regs (6.05%), Wynn Macau 4.5000 Conv 07/03/2029 Series 144A (5.01%) and Meituan 0.0000 Conv 27/04/2028 Series Corp. (4.76%).*
Sector-wise*, the fund is largely invested in consumer discretionary (21.87%), followed by IT (18.36%), industrials (14.02%), communication services (13.61%) and financials. (9.16%). Country-wise*, the fund’s investments are largely overweight in China (51.86%), followed by South Korea (12.72%), Hong Kong (7.14%), India (6.05%) and Macao (5.01%).
Redwheel Asia Convertibles Fund
Launched in 2011, this fund combines four primary sources of return. This includes bottom-up equity security selection, thorough credit research, top-down macro and thematic positioning, and the mixing of convertible derivative characteristics.
RedWheel Asia Convertibles fund has total assets under management of $76.3 mn. The fund is benchmarked against the Thomson Reuters Asia ex-Japan Hedged CB Index. The fund has an annual management charge of 0.90%. It has risen 4.07% year-to-date and since its inception, the fund has given 58.42% returns.
Sector-wise, the RedWheel fund is largely invested in consumer discretionary (25%), IT (19.80%), communication (12.30%), industrials (12.10%) and real estate (7.60%). Country-wise, the fund has the largest holdings in China (47.80%), Hong Kong (13.80%), South Korea (9.35%), Singapore (5.80%) and Taiwan (5.70%).* Fund information was only available for share class B.
Redwheel Asia Convertibles Fund is managed by Davide Basile, head of the RedWheel Convertible Bonds team. Basile has been at RedWheel since 2010 after working with Morgan Stanley for 5 years.
LO Funds – Convertible Bond Asia (USD) M A
Launched in 2008, the LO Funds – Convertible Bond Asia (USD) M A is an actively managed long-only convertible bond strategy focusing on the Asia-Pacific by Lombard Odier Investment Managers.
The fund charges a management fee of 0.825%. As of June 30, 2023, the fund had total assets under management of $315.02 mn.
Since its inception, the fund has given 76.29% in returns. Total returns in the last 12 months expanded by 4.36% as of July 11, 2023. Additionally, the fund is benchmarked against the Refinitiv Convertible Asia Ex-Japan USD Index.
The fund aims for an overall high-quality portfolio, and thus aims for a minimum credit rating of B-.
As of May 2023, the top 5 holdings of the fund are — Posco 0% 01/09/26 Cnv (6.32%), SK Hynix 1.75% 11/04/30 Cnv (5.977%), Lenovo Grp 2.5% 26/08/29 Cnv (5.02%), Anllian Cap 0% 05/02/25 Cnv (4.92%), and Bharti Airtel 1.5% 17/02/25 Cnv Regs (4.40%). The fund is managed by Arnaud Gernath and Natalia Bucci, Investment Managers at Lombard Odier. Bucci has been managing convertible bond portfolios for 14 years, while Gernath has been involved in the convertible bonds market since 1996.
*As of June 30, 2023
