JPMorgan Funds - Global Convertibles Fund

Convertible bonds: the best of both worlds

Important information
Information of the JPM - Global Convertibles Fund (EUR), including the risk profile, investment process and main features of the fund:
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Global Convertible Bonds, the best of both worlds. January 2009
The basic structure of a convertible combines a fixed income instrument with an equity option. This means investors can share in the upside potential of the underlying equity, which is something straight bond investors would not. In addition, the fixed income element of the convertible offers greater downside price protection than outright common equity investors would have.
Given the hybrid nature of a convertible, investors are exposed to a broad range of both equity and debt risks. The fixed income element of a Global Convertible Bonds (CB) is derived from the coupon and the claim to principal. Therefore the price will change with movements in interest rates and the credit quality of the issuer. The debt component of a CB protects the convertible from the possible full decline of the equity price.
The equity element of a CB is derived from the call option or warrant embedded in the security and gives the bond participation in any equity price appreciation. The equity component of a CB is driven by factors affecting the underling stock price.

Volatility and diversification
Volatility of the underlying stock will affect the value of the option embedded in the convertible. With a rise in volatility there will be an increase in the potential price appreciation of the equity option meaning the price of the convertible will rise. An increase in the dividend of the equity will decrease the value of the CB as the relative value of the CB decreases compared to the equity. In addition the longer the time to conversion of the bond the greater the value of the CB.
Including CBs in a balanced portfolio of equities and bonds should be an extra source of diversification in a portfolio and can improve its risk/return characteristics.
At the current levels (January 09), the market is highly attractive. We also take account of the technical characteristics of CBs after the dramatic sell off of the asset class in 2008. The opportunities for meaningful levels of return for outright or total return investors are clear, due to the high crisis of confidence we have seen this year.