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.
Geographic Diversification
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 caminfo@calamos.com.