As a member of the portfolio management team for our convertible bond strategies, I view volatility as an ally, not an enemy. Volatility provides us the opportunity to readjust the risk/reward of portfolios to provide what we believe will be the best profile given where we are in an economic business cycle. Although some convertible bonds can act just like equities and some convertible bonds can act like corporate bonds, we generally choose to stay in the “sweet spot” of the convertible spectrum where we can maximize upside with equity markets, while simultaneously minimize downside.
We like to use the favorable attributes convertible bonds afford us. An increase in volatility often means an increase in uncertainty and with more uncertainty, ensuring an optimal risk/reward is paramount to long-term success—volatile markets give us the chance to maintain that favorable risk profile.
Markets move up and markets move down, but we have long cautioned investors to not let short-term events lead them away from their long-term strategies. We remind ourselves of that when we see volatility and heightened uncertainty. Sticking to a multifaceted, repeatable and continually improving investment process designed to maximize success and persevere over the long term has been key for us in volatile times. The convertible strategies’ investment process is focused on risk management, equity valuation, convertible bond structure, quantitative screening, credit analysis, a macro overlay and identifying long-term secular themes.
Let’s take a closer look at one part of this process: our focus on secular themes. We believe our emphasis on companies tied to long-term societal themes or multi-cycle trends helps minimize errors and enhances the prospects for success over time.
Twelve years ago, we wrote an article to our clients about the secular trends we were seeing, which included demographic shifts, the global war on terror, infrastructure rebuild, accessing all information anywhere and any time, and biotechnology/genetics. These themes have helped guide us in volatile times and are still very prevalent today.
Currently, we see other multi-cycle trends that we believe also will serve as a “beacon in a volatile storm,” by keeping us focused on the long term. Among others, these include artificial intelligence, big data, automated driving, cyber security, and blockchain technology.
For more information, see:Return to the Volatility Guide
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
Past performance is no guarantee of future results.
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.
Jon Vacko, CFA
Senior Vice President, Senior Co-Portfolio Manager