He says convertibles are currently being priced below their intrinsic bond values following fire sales from deleveraging in October and November and the sector could yield opportunities for investors in the years ahead.
Kearney says: “A huge proportion of the convertibles’ market has dropped through the bond floor because it is a sector which is laden with hedge fund activity. If you are picking these up at less than the bond floor, you are picking them up with implied yields of double digits and they come with almost a free offering in terms of converting into the equity.”
Kearney favours the “very conservatively” run RWC glo-bal convertibles fund managed by Miles Geldard and Lee Manzi as it avoids synthetics and only deals in “real” convertible bonds via the cash market.
Standard convertibles are bonds which can be conver- ted into the equity of a firm’s stock, often at a pre-announced ratio, whereas synthetics combine a non-convertible debt instrument with an option or warrant to mimic the characteristics of a convertible.