12 out of 12 times: Pars on Convertibles’ Outperformance vs. Bonds When Rates Rose

Call it a cool dozen: As the 10-year Treasury climbed 129 points from July 2021 through March 2022, convertible securities clinched their 12^th consecutive period of outperformance versus bonds (the Bloomberg US Government/Credit Bond Index versus the ICE BofA All US Convertibles Index). Twelve out of 12 times, convertibles beat Treasuries and—on five occasions—equities (S&P 500). (See chart here)

Like today’s environment, previous rising rate periods have often been mid-cycle, according to Co-CIO Eli Pars in this latest video discussion with Executive Vice President and Chief Distribution Officer Robert F. Behan. In such periods, he says, “The market takes time to adjust to the Fed’s new reality. But the economy’s doing well and the equity markets are off to the races and the converts have an option to convert into equity.

“It’s not a correlation trade like some asset classes,” clarifies Pars, also Head of Alternative Strategies and Co-Head of Convertible Strategies, Senior Co-Portfolio Manager. “With the underlying equity up, the convert is going to move up with it, and that creates interesting opportunities to diversify fixed income.”

Investing in convertible securities is a “Heads, I win. Tails, I don’t lose so much.” proposition, Pars explains in the video.

“If we do our work right—we do our credit work and we understand the convertible and we’re optimizing the portfolio—I buy a convert at par but the stock doesn’t do anything and the stock goes down, maybe it takes a little mark to market hit. At the end I get par back at maturity and I get a coupon along the way. But,” continues Pars, “if [the stock] works, it’s that compounding of gains over time that really makes a difference.”

Watch the complete six-minute video for Pars’ additional comments on:

• Using convertibles to diversify both fixed income and equity holdings in a portfolio. They’re especially helpful today, he says, for “a client who’s made a lot of money but wants to take some chips off the table but doesn’t necessarily want to call the end of the bull market. Converts are a great way to take the risk down a bit but still keep exposure. Conversely, if you’ve got an investor who’s missed a lot of the recent run and wants to get back in but is reluctant to buy at what looks to be 5% from the S&P 500’s all-time high, converts are a great tool for that, as well.”
• The $500 billion global convertible market, offering a wider set of opportunities. “It’s about 60% US, 20% Europe and the rest Asia and Japan. The US in particular is weighted toward tech but you also have healthcare, consumer and a nice mix of companies,” says Pars. (For more, see this recent blog post.)
• The importance of active management when investing in converts: “When a stock runs up and the convert is deep in the money, you want to rotate into something with a little more risk/reward so that you’re not running that equity all the way back down. An active manager can optimize the portfolio to give you the best outcome.”

Investment professionals, for additional insights about convertibles or any of our six convertible-using open-end funds or our six convertible-using closed-end funds, reach out to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.