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Alternative Market Briefing

Other Voices: Great rotation? What great rotation?

Friday, May 17, 2013

Alex McKnight
In the article below, Alex McKnight, investment manager at GAM, an independent, active investment management firm, comments on why convertibles are catching investors’ eyes.

We believe the "great rotation" is overhyped, what we are seeing is actually a natural shift into riskier equity linked assets as markets rise and risk aversion begins to wane. This reflects fixed income investors moving into areas that are less exposed to the rise in interest rates and falling bond yields that typically occur when economies are improving and equity markets are rising. Given the strong performance of credit markets last year we are starting to see investors switch out of investment grade and high yield credit into convertible bonds, to take advantage of increasingly bullish markets.

Convertible bonds issuance has been strong this year, with deals announced in European household names including Air France and Melia Hotels. While not all recent convertibles issuance represented good value for money, we believe there is no such thing as 'bad’ new issuance. Deals can be individually poor, yet new issuance is always positive for the market as it provides greater choice and indicates that issuers are keen to release paper, thereby widening the investable universe. Lower quality issues also create attractive hedging opportunities as they can be shorted.

The UBS Global Focus Inv Grade CB Index ha......................

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