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Convertibles: Why Limit Yourself to Less Than Half the Market?
September 27, 2017First published: August 9, 2017
If you’re convinced of the potential for convertible securities at this time in the market cycle—and their 2017 performance to date has turned more than a few financial advisors into believers—you may be ready to broaden your horizons to beyond the U.S.
The global convertibles market offers twice the opportunity, and the opportunities are varied.
As an asset class, convertible securities can be an effective tool to diversify fixed income and hedge the risk of rising rates. Global convertible securities offer additional benefits.
Almost half of the BofA Merrill Lynch Global 300 Convertible Index (VG00) includes exposure to non-U.S. countries.
While the U.S. is a dominant issuer of convertibles (see graph below), non-U.S. convertibles make up their share of the global market—44% in 2017 as of July 31, 2017.
One of the most exciting trends in the convertible market has been the expanding role of issuers from emerging markets.
Equity-like And Bond-like
Another key difference between U.S. and non-U.S. bonds can be seen in the delta of the local markets.
If you’re accustomed to the U.S. convertible market, you likely think of convertible bonds as more equity-like. In fact, the U.S. bonds have the highest deltas. By contrast, the deltas of European convertible bonds are among the lowest in the world—they’re more bond-like.
The table below provides some insight into which sectors in which countries have participated in issuing convertible bonds.
“The sector issuance totals reflect the economic sectors in each region that have found it advantageous to bring convertibles to market,” says Calamos Senior Vice President and Portfolio Specialist R. Scott Henderson, CFA, CIMA, CMFC.
While the technology and health care sectors lead issuance in the United States, in Japan and Europe the materials sector relies most on convertibles.
Expanding the universe of convertible bonds invested in makes it possible to reach certain ranges of deltas. This provides additional diversification beyond what’s available with a U.S.-only convertible allocation.
Additionally, the BofA Merrill Lynch Global 300 benchmark index (VG00) has a slightly higher relative credit quality—BBB3 versus the VXA0 at BB1 (data as of 7/31/17).
“Of course,” Henderson adds, with “higher credit quality and international investing, one also must consider the lower current yield of the global convertible market.”
CONV has a 2.59% average coupon versus the VXA0 at 3.57% (data as of 7/31/17).
A Rare Opportunity
The global convertible bond fund is more common in other countries, the interest stimulated in part by international investors’ desire to access the largest convertible bond market in the United States.
As of this week, Calamos Global Convertible Fund (CXGCX) is the lone global convertible funds included among the 24 funds in Morningstar’s U.S. Funds Convertibles category.
CXGCX draws on Calamos’ 40 years of investing in convertibles, an asset class pioneered by Founder, Chairman and Global CIO John P. Calamos, Sr. Having tracked the global market’s evolution, Calamos established CXGCX three years ago as a complement to the Calamos Convertible Fund (CICVX).
While CICVX is U.S.-centric with a small foreign allocation, its global counterpart is 44% foreign (data as of 6/30/17), and typically has a meaningful emerging markets allocation.
A word of caution when evaluating CXGCX: The predominance of U.S.-only convertible funds in the Morningstar Convertibles category will skew comparisons. The better comparison is against the fund’s benchmark.
Why companies turn to convertible bonds
Today, some of the most dynamic companies issue convertible bonds to finance their growth. Recent issuers have included such well-known names as Tesla, Sony, Alibaba, Ctrip.com, Möet Hennessy Louis Vuitton, Netflix and Spotify.
Over time, companies have used convertible bonds:
- To finance growth—equity kickers enabled the sale of fixed income securities with lower yields
- As a means of financing acquisitions
- As a means of accessing capital
- To finance debt
- To lower fixed income costs
- To add equity to their balance sheet (using convertible preferreds)
- To broaden the shareholder base—early on in the United States when financial institutions could buy bonds but not common stock, convertibles offered a workaround and later as a means of offering bonds to foreign investors.
- For unseasoned securities to offer an incentive for buyers
For More Information about Global Convertible Securities
Advisors, could you use additional information about global convertible securities and how they’re used? For more information, please talk to your Calamos Investment Consultant at 888-571-2567 or [email protected].
An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve their investment objectives. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also have specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund(s)’ prospectus.
The principal risks of investing in the Calamos Global Convertible Fund include: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk, forward foreign currency contract risk, portfolio selection risk, and liquidity risk.
The principal risks of investing in the Calamos Convertible Fund include: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, equity securities risk, interest rate risk, credit risk, high yield risk, portfolio selection risk and liquidity risk.
As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
The BofA Merrill Lynch All U.S. Convertibles Index (VXA0) measures the return of all U.S. convertibles.
The BofA ML Global 300 Convertible Index (VG00) is a global convertible index composed of companies representative of the market structure of countries in North America, Europe and the Asia/Pacific region.
The BofA Merrill Lynch Global Convertible Index (CONV) is a broad-based, market-capitalization weighted index that covers the major convertible markets around the world.
Delta is how much the convertible value rises or falls for a given stock move.
Total return assumes reinvestment of dividends and capital gains distributions and reflects the deduction of any sales charges, where applicable. Performance may reflect the waiver of a portion of the Fund's advisory or administrative fees for certain periods since the inception date. If fees had not been waived, performance would have been less favorable.
Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information or call 1-800-582-6959. Read it carefully before investing.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE