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An asset class for all seasons |
An asset class for all seasons: 20 years of investing in convertible bonds
key takeaways.
- To mark the 20th anniversary of BWB’s Global Convertible Bonds strategy, we explore what makes the asset class ideal for navigating through market cycles
- Convertibles allow investors to participate in potential equity upside, while enjoying the downside protection of a bond
- We expect continued issuance growth after a surge in 2024, supported by key themes including AI and electrification.
The 20th anniversary of BWB’s Global Convertible Bond strategy1 offers a chance to highlight the distinctive features of this asset class. Our long-term view helps us understand trends and observe what is constant and unique about the instruments.
Bridging the gap
Convertibles bridge the gap between the fixed income and equity worlds. The bond component offers the protection of cash flows and a redemption value, whilst the embedded option provides potential equity upside participation. Multiple performance drivers can help investors through different economic cycles.
The asset class also adds diversification to a traditional equity and fixed income allocation. Notably, around 50% of convertible bond issuers do not have other listed/public debt. The universe offers both regional (Asia, in particular) and sector diversification.
This is the only asset class offering long-term global equity optionality. Timing when performance is likely to kick in is difficult; owning a convertible leaves sufficient time for the equity story to unfold gradually and for the embedded option to benefit from underlying share price appreciation.
our expertise.
convertible bonds: well-placed for the new Trump era
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Global Convertible Bonds
learn moreConvertible bond prospectuses generally contain clauses aligning shareholder and convertible holder interests, including both protection and significant possible upside in M&A scenarios. In fact, convertible holders can have an advantage over shareholders in certain circumstances.
A focus on growth
One constant has been the high level of convertibles issuance from growth companies with an innovation bias. The bonds appeal to small and mid-size firms looking to finance growth via a fixed-income instrument without immediate equity dilution.
Each year, some if these growth stocks have generated outstanding returns (e.g., Tesla and Etsy in 2020, MicroStrategy in 20242). Cumulatively, they have contributed the most to the asset class’s performance since 20153.
Convertible bonds can provide significant upside as companies reach an inflection point in their development, as well as downside protection for investors in profitable companies. This is now the case for most convertible growth-biased issuers, as opposed to early 2021, when many were unprofitable and growth was funded by borrowing. As interest rates rose, this proved challenging.
An all-weather vehicle
At PUTNAM, we focus on limiting drawdowns via a quality credit bias and capturing upside potential in convertibles, which we believe maximises the risk/reward over a market cycle. This is especially true during periods of market turbulence – e.g., 2008, 2016 and 2022. In those years, our strategy limited drawdowns versus most peers4.
The features of convertibles and our tried-and-tested approach have helped our strategy achieve competitive risk-adjusted performance relative to other traditional asset classes5.
Over the last 20 years, the strategy captured around 50% of global equity upside with only a third of the volatility. This resulted in a favourable Sharpe ratio6, as shown in Figure 2.
FIG 1. Global Convertible Bond strategy gross composite7 performance vs strategy benchmark8
FIG 2. Global Convertible Bond strategy Sharpe ratio vs other liquid assets6
FIG. 3. Summary risk indicator and synthetic risk and reward indicator9
Outlook for 2025
We believe that convertible bonds are well positioned for 2025. Key reasons include:
- Yield pays us to be exposed to the equity market
- Inexpensive valuations and issuers with strong credit quality have brought convexity10back
- The universe net expanded in 2024 after the primary market added almost USD 120 billion in new paper
- The bonds offer diversification, especially for fixed income investors.
FIG 4. Convexity: the return of asymmetry in 2023 and 202411
Currently, 75% of our global strategy is exposed to the following six high-conviction equity themes for 2025:
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1. |
Artificial intelligence (AI): We expect issuers exposed to the next phases of AI development to perform well as the path to monetisation becomes clearer |
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2. |
Cryptocurrencies: Convertibles can provide exposure for a range of risk appetites |
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3. |
Electrification: Electricity demand is projected to surge over the next decade, and convertibles offer exposure to some of the leaders in the space |
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4. |
Geopolitical shifts: Convertibles provide upside optionality to a potential economic recovery in China with limited credit downside; other issuers may get a boost from higher defence spending in Europe |
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5. |
US reshoring: As the US focuses on re-industrialisation, issuers that may benefit include rare earth miners and semiconductor equipment manufacturers |
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6. |
Consumer strength and brand power: We foresee a supportive macroeconomic backdrop for the consumer in general this year, and we prefer brands with pricing power |
Read more: The equity market is ripe for a broadening
Doing what it says on the tin…
In general, we expect convertibles issuers (e.g., banks, biotechnology) to benefit as lower rates, a strong equity market and renewed corporate confidence boost M&A volumes. The new Trump administration’s business-friendly policies and domestic focus could also broaden equity performance, benefiting many small and mid-sized issuers.
We believe these instruments are well-positioned given the investment themes likely to dominate in 2025. As they have for much of the past two decades, convertibles are behaving exactly as you would expect: providing equity upside and protecting capital on the downside.
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[1] As of 31 December 2004, the strategy has followed the FTSE Russell Global Convertible Composite (Hedged EUR).
[2] Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document
[3] PUTNAM, Bloomberg, as of 31 Dec. 2024
[4] Source: PUTNAM . FTSE Russell.
[5] Past performance is not a guarantee of future results.
[6] Source: PUTNAM . 31/12/04 to 31/12/2024. Performance data comes from a composite. Past performance is not a guarantee of future results. For illustrative purposes only
[7] Composite and Benchmark Definition
This composite contains all funds and mandates invested into global convertible bonds. Its core investments consist mainly in investment-grade, liquid, balanced convertible bonds (i.e. with a delta ranging from 35% to 60%), which represent an attractive combination of equity sensitivity and a consistent protection in case of a downturn, while allowing some exposure to issues with a minimal B rating and deltas outside the above-mentioned range. The Fund’s investment universe encompasses the financial markets in which convertible bonds play a significant role (US, Europe, Japan, the Asia-Pacific region). Exposure to non-EUR currencies in the funds within the composite is hedged at 90% at least using foreign exchange forward contracts. The composite leverage at year end was: 2016- 76%, 2017- 82%, 2018- 96%, 2019- 78.79%, 2020- 76.64%, 2021- 65.21%, 2022- 104.40% and 2023- 114.07% the FUND LOF Convertible Bond (REG) P. Withholding tax on income is treated on a cash basis, whereby recoverable withholding tax, dependant on where a client is domiciled, is added back performance when occurring Composite benchmark is FTSE Russell Global Convertible Bond Composite Index HDG EUR.
Management Fees and Other Information
All returns are presented gross of fund total expense ratio or all-in-fee. The maximum TER for this strategy is 1.65% based on the PUTNAM - Convertible Bond PA share class (investment above CHF 1 million), with a management fee of 0.65%. Withholding taxes on dividends and interest are presented from a Luxembourg investor's point of view, whereby the recoverable withholding tax is added back to performance. Further information on calculation methodologies and composite management procedures is available upon request. The strategy can use financial derivative instruments not only for hedging purposes or for EPM, but also as part of the investment strategy, subject to pre-defined limits. The presented internal dispersion is an equal-weighted standard deviation of annual portfolio returns considering at least five portfolios in the composite for the entire year. All-in-fees include custody, administration and management fees. The percentage at year-end of portfolio in this composite that were charged with a bundled fee was: 2019 = 1.97%, 2018 = 2.63%, 2017 = 2.16%, 2016 = 1.92%, 2015 = 1.85%, 2014 =1.92%, 2013 = 1.01%, 2012 = 1.33%, 2011 = 1.46%, 2010 = 3.51%, 2009 = 2.97%, 2008 = 0%, 2016 = 0%
GIPS Firm definition
PUTNAM ADVISORY CO LLC (BWB), the institutional asset management unit of PUTNAM worldwide comprising all discretionary institutional mandates and all PUTNAM public investment funds managed at the PUTNAM unit, but excluding Private Equity mandates and funds and the 1798 Hedge Fund family (as of 01.01.2013) as subject to a different management process. PUTNAM Exchange Traded Funds (ETF's) have been included since launch in April 2015.
Past Performance is no guarantee for future results.
Firm Definition
The firm definition was recently changed by mentioning the non-inclusion of the PUTNAM Private Equity portfolios and the exclusion of the 1798 Hedge Fund family as of January 1, 2013. This change was done for accuracy purposes and involves no change in the composite list or no material change in the assets under management figures.
Significant Cash Flow Policy
The firm applied a Significant Cash Flow Policy for this composite until December 31, 2010 whereby portfolios were temporarily excluded from the composite on any significant cash flow occurrence. This practice was abandoned on January 1, 2011 and no portfolios were excluded for significant cash flow reasons as of that date.
[8] Source: PUTNAM, 31/12/04 to 31/12/24. Composite is the FTSE Russell Global Convertible Composite Hedged EUR. Past performance is not a guarantee of future results. For illustrative purposes only.
[9] This summary risk indicator (SRI) is a guide to the level of risk of this product compared to other products. Where there are less than 5 years of data, missing returns are simulated using an appropriate benchmark. The SRI may change over time and should not be used as an indicator of future risk or returns. Even the lowest risk classification does not imply that the Sub-Fund is risk-free or that capital is necessarily guaranteed or protected.
[10] We define convexity as an asymmetric return profile whereby gains are typically larger than losses.
[11] The ratio explains how much ‘up’ capture CBs had relative to ‘down’ capture with the underlying stock, on average, over the last 6-month window. >1 = postiive convexity, while <1 = negative convexity. Updated quarterly. Source: PUTNAM, FTSE Full Global Convertible Bond Index. For illustrative purposes only. Past performance is not a guarantee of future results.
[2] Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document
[3] PUTNAM, Bloomberg, as of 31 Dec. 2024
[4] Source: PUTNAM . FTSE Russell.
[5] Past performance is not a guarantee of future results.
[6] Source: PUTNAM . 31/12/04 to 31/12/2024. Performance data comes from a composite. Past performance is not a guarantee of future results. For illustrative purposes only
[7] Composite and Benchmark Definition
This composite contains all funds and mandates invested into global convertible bonds. Its core investments consist mainly in investment-grade, liquid, balanced convertible bonds (i.e. with a delta ranging from 35% to 60%), which represent an attractive combination of equity sensitivity and a consistent protection in case of a downturn, while allowing some exposure to issues with a minimal B rating and deltas outside the above-mentioned range. The Fund’s investment universe encompasses the financial markets in which convertible bonds play a significant role (US, Europe, Japan, the Asia-Pacific region). Exposure to non-EUR currencies in the funds within the composite is hedged at 90% at least using foreign exchange forward contracts. The composite leverage at year end was: 2016- 76%, 2017- 82%, 2018- 96%, 2019- 78.79%, 2020- 76.64%, 2021- 65.21%, 2022- 104.40% and 2023- 114.07% the FUND LOF Convertible Bond (REG) P. Withholding tax on income is treated on a cash basis, whereby recoverable withholding tax, dependant on where a client is domiciled, is added back performance when occurring Composite benchmark is FTSE Russell Global Convertible Bond Composite Index HDG EUR.
Management Fees and Other Information
All returns are presented gross of fund total expense ratio or all-in-fee. The maximum TER for this strategy is 1.65% based on the PUTNAM - Convertible Bond PA share class (investment above CHF 1 million), with a management fee of 0.65%. Withholding taxes on dividends and interest are presented from a Luxembourg investor's point of view, whereby the recoverable withholding tax is added back to performance. Further information on calculation methodologies and composite management procedures is available upon request. The strategy can use financial derivative instruments not only for hedging purposes or for EPM, but also as part of the investment strategy, subject to pre-defined limits. The presented internal dispersion is an equal-weighted standard deviation of annual portfolio returns considering at least five portfolios in the composite for the entire year. All-in-fees include custody, administration and management fees. The percentage at year-end of portfolio in this composite that were charged with a bundled fee was: 2019 = 1.97%, 2018 = 2.63%, 2017 = 2.16%, 2016 = 1.92%, 2015 = 1.85%, 2014 =1.92%, 2013 = 1.01%, 2012 = 1.33%, 2011 = 1.46%, 2010 = 3.51%, 2009 = 2.97%, 2008 = 0%, 2016 = 0%
GIPS Firm definition
PUTNAM ADVISORY CO LLC (BWB), the institutional asset management unit of PUTNAM worldwide comprising all discretionary institutional mandates and all PUTNAM public investment funds managed at the PUTNAM unit, but excluding Private Equity mandates and funds and the 1798 Hedge Fund family (as of 01.01.2013) as subject to a different management process. PUTNAM Exchange Traded Funds (ETF's) have been included since launch in April 2015.
Past Performance is no guarantee for future results.
Firm Definition
The firm definition was recently changed by mentioning the non-inclusion of the PUTNAM Private Equity portfolios and the exclusion of the 1798 Hedge Fund family as of January 1, 2013. This change was done for accuracy purposes and involves no change in the composite list or no material change in the assets under management figures.
Significant Cash Flow Policy
The firm applied a Significant Cash Flow Policy for this composite until December 31, 2010 whereby portfolios were temporarily excluded from the composite on any significant cash flow occurrence. This practice was abandoned on January 1, 2011 and no portfolios were excluded for significant cash flow reasons as of that date.
[8] Source: PUTNAM, 31/12/04 to 31/12/24. Composite is the FTSE Russell Global Convertible Composite Hedged EUR. Past performance is not a guarantee of future results. For illustrative purposes only.
[9] This summary risk indicator (SRI) is a guide to the level of risk of this product compared to other products. Where there are less than 5 years of data, missing returns are simulated using an appropriate benchmark. The SRI may change over time and should not be used as an indicator of future risk or returns. Even the lowest risk classification does not imply that the Sub-Fund is risk-free or that capital is necessarily guaranteed or protected.
[10] We define convexity as an asymmetric return profile whereby gains are typically larger than losses.
[11] The ratio explains how much ‘up’ capture CBs had relative to ‘down’ capture with the underlying stock, on average, over the last 6-month window. >1 = postiive convexity, while <1 = negative convexity. Updated quarterly. Source: PUTNAM, FTSE Full Global Convertible Bond Index. For illustrative purposes only. Past performance is not a guarantee of future results.
important information.
For professional investors use only
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
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