Benjamin Schapiro
Head of Convertible Bonds
Drawing on the convex nature of convertible bonds
At UBP, we capitalise on convertibles' convex nature through a proven investment approach refined over two decades.
Convertible bonds are unique hybrid securities that blend the characteristics of traditional bonds and equities. They allow investors to participate in the upside of the underlying stock while benefiting from the downside protection of a fixed-income instrument. This combination results in an asymmetric risk–return profile, known as convexity, which can enhance portfolio diversification and optimise performance across various market conditions.
At UBP, we have been pioneers in the management of long-only convertible bonds since 1999, developing a distinctive expertise in this often-overlooked asset class.
The enduring appeal of convertible bonds
Convertible bonds provide investors with several compelling advantages that make them an attractive addition to diversified portfolios:
Convexity.
Convertibles' asymmetric risk–return profile allows investors to capture more of the upside than the downside of the underlying equity, thanks to the bond floor and the embedded conversion option. This convexity can lead to superior risk-adjusted returns over a full market cycle.
Diversification.
Convertible bonds have historically exhibited low correlations to equities and traditional fixed income. This makes them a valuable diversification tool, particularly in market stress when correlations between asset classes increase.
Lower interest rate sensitivity.
While convertibles have a bond component, they are typically less sensitive to interest rate movements than straight corporate bonds of similar duration.
Abundant opportunities.
The global convertible bond market has grown recently with issuance from companies across geographies, sectors, and market capitalisations. This gives active managers an opportunity to select the most compelling investments.
At UBP, these enduring characteristics, combined with our proven investment approach, make convertible bonds a valuable "all-weather" building block for investors seeking to optimise their portfolios' risk–return profile.
A distinctive approach to convertible bond investing
UBP's convertible bond strategies employ a robust investment process to identify the securities with the most attractive convexity profiles. This process is built on three key pillars that define our team's investment philosophy:
- Rigorous credit analysis: Preserving capital is our top priority. We conduct an in-depth analysis of issuers' creditworthiness, seeking solid bond floors that can provide downside protection. For us, this is the bedrock of a convertible's convex profile.
- Fundamental equity research: We generate alpha by capturing equity upside. We take a bottom-up approach, searching for convertibles whose underlying stocks have significant appreciation potential over the medium to long term. This is essential to unlock upside potential.
- Attention to technicalities: We aim at optimising the asymmetrical quality of a convertible bond allocation by favouring balanced convertible bond profiles as they offer the most convexity.
Sustaining these pillars is our conviction that convertible bonds are an underappreciated asset class that can act as an efficient alternative to traditional equities or bonds. By dynamically allocating across the full spectrum of a convertible's components – credit, equity, and options – we aim to deliver an enhanced risk–return profile for our investors. This philosophy is deeply embedded in our team's DNA and drives every aspect of our investment process.
Get in touch with our experienced convertible bond team
Learn how our distinctive strategies can help you navigate today's challenging markets and achieve your investment objectives.
Tailored strategies for diverse investor needs
We have three different strategies through Luxembourg-domiciled, UCITS-compliant investment vehicles, which are intended to exploit this key feature
Global Convertible Bond.
Broad exposure to the global convertible bond market, seeking to capture the asset class' convex return potential while managing downside risk.
European Convertible Bond.
A focus on the European market, with the aim of outperforming regional bonds over a complete market cycle.
China Convertible Bond.
Access to the dynamism of the world’s second-largest economy, China, through the asymmetry benefits of convertible bonds.
"Convertible bonds offer a unique asymmetric risk–return profile. They have a role in investors' asset allocation by diversifying equities and bonds. Typical issuers are mid-cap companies with higher-than-average growth prospects. This grants our asset class the benefits of various secular growth themes across cycles."
Investor Insights
Convertible bonds are often issued by mid-sized, high-growth companies, in various sectors. These firms benefit from the flexible financing convertibles provide compared to traditional bonds.
Convertibles are categorised according to their equity sensitivity:
- Bond-like (equity sensitivity <20%)
- Balanced (equity sensitivity 20–70%)
- Equity-like (equity sensitivity >70%)
Balanced convertibles offer the most convexity, capturing more upside than downside from the underlying stock.
Equity sensitivity measures a convertible bond's price change for a 1% move in the underlying stock. All other things being equal, a convertible bond with 50% equity sensitivity is expected to capture 50% of its underlying equity move.
Convexity should not be taken for granted. In fact, the risk–return ratio is the highest when the convertible bond is balanced between its equity sensitivity and its bond component. This is why, in our process, we focus on balanced convertibles, as we intend to maximise the convexity potential of our portfolios.
Meet the team
UBP's Convertible Bonds team, led by Benjamin Schapiro, comprises six seasoned investment professionals, including five portfolio managers with an average of 16 years of experience. The team's approach is highly collaborative, with most of its members based in our Paris office, fostering a collegial and efficient working environment. An investment specialist and an independent risk manager complement the team.
With their combined expertise and proven track record, the team is well-positioned to navigate the complexities of the convertible bond market and deliver attractive risk-adjusted returns for investors.
Key facts and figures
- Close to EUR 1 billion in assets under management, reflecting the team's established presence in the market
- Manages three open-ended strategies, offering investors access to the team's expertise across different geographies
- A collaborative and integrated approach, with all team members promoting seamless communication and idea-sharing
Your contact
24.09.2024
High-income segment of fixed income in favour
The positive view towards fixed income is best expressed through the higher-income segments of the market given robust nominal GDP growth and elevated all-in yields that are still in excess of the historical returns of global equities.
19.09.2024
Exploring emerging market fixed income opportunities
Despite recent volatility, emerging markets (EMs) continue to hold significant potential for investors. The current global trends and market conditions present several tailwinds that can drive growth and create opportunities in EM fixed income investments. Here, we explore these tailwinds and discuss the investment implications for the second half of 2024.
