Convertible bonds: the best of both worlds

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

J.P. Morgan Asset Management has been managing convertible portfolios since 1995. There are three key factors that differentiate our investment process from that of our competitors:

  • To make the most of convertibles, it is important to invest with a provider that has the experience and expertise to harness the investment opportunities from all over the world in a changing market environment. At J.P. Morgan Asset Management the experienced, dedicated team are real specialists in the asset classes. J.P. Morgan Asset Management has better coverage than its competitors with investment professionals located in regional markets around the world.
  • One of J.P. Morgan Asset Management main competitive advantages is the people and team structure. The dedicated global convertibles team sits with the Global Multi Asset Group within our equity division and they share information. This stands out amongst competitors who often operate on a “silo” basis, with equities, convertibles and other fixed income products being managed by entirely separate teams.
  • J.P. Morgan Asset Management’s dedicated global convertibles team have experience in managing these specialist instruments with a strong focus on security selection and underlying equity valuation. The investment process employed has been tested and refined through market cycles and the performance of the strategy has proved the effectiveness of the investment process.

The objective of the JPMorgan Funds - Global Convertibles Fund (EUR) is to provide a return by investing primarily in a diversified portfolio of convertible securities and warrants, globally. It is a core fund, offering exposure to good quality convertible bonds.

Important information and risk profile of the fund
Information of the funds, including the risk profile, investment process and main features: Click on the fund name to see the interactive fund factsheet and all the legal documents of each fund (see library).
Convertibles are a hybrid between debt and equity, permitting holders to convert into shares in the company issuing the bond at a specified future date. Therefore, investors should be prepared for greater volatility than straight bond investments, with an increased risk of capital loss, but with the potential of higher returns.