High-yield convertible bonds can offer the potential for a bigger profit for investors, but with the higher return is the potential for higher risk. So, while they offer a potentially higher return they come with higher risk and do not offer the same liquidity as investment grade convertibles. Investment into the more expensive investment grade convertible bonds may be considered the safer option, while the high-yield strategy offers potentially higher returns.
The majority of the universe of convertible bonds is non rated which means that a fund manager and his credit team need to do a shadow rating to assess the quality of the credit and the cheapness (or not) the of equity. The lack of rating does not necessarily indicate poor quality, it may be that some smaller companies choose not to pay for the rating from the agencies. However, the research should be done to evaluate the benefit and risk of investing.
While there is plenty of choice and the concept may seem complicated, there are potentially good investment opportunities in the convertible bond space and the added diversification that they can add to a portfolio makes them worth a second look.
Stephanie Carbonnei is Senior Investment Manager at Architas
