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Asia Pacific Intelligence

Asian convertibles offer performance with lower volatility

Thursday, December 05, 2013

RWC, the $7.3bn active investment manager, has recently taken a look at Asian equities. The firm reports that demographics and higher growth rates are among the factors that drive investor interest in Asian equities but finds that while finding outperforming Asian equity managers can be rewarding, this often comes with the undesirable by-product of high volatility.

Davide Basile, Head of Convertible Bonds at RWC, comments that it is surprising that more investors do not use the convertible bond market to access the Asian story:

"When we compared the performance of Asian convertible bonds with global convertibles and equities over the past decade we found that the asset class can offer investors a number of benefits. Asian equities outperformed global equities substantially over this period, which is part of the reason why Asian convertibles outperformed global convertibles. However, the convertibles market in Asia shows some notable features" he says.

"It is fair to say the asset class has performed well through the business cycles of the past decade beating global equities and delivering returns similar to Asian equities, however if you look at that outperformance it comes with much lower volatility. If you look at the period from 2000 to October 2013 the MSCI Asia ex-Japan Total Return index returned 139.9% with annualised volatility of 21.7%, whereas the UBS Asia Focus Convertible Bond Index returned 133.2% over the same period but with only a third of the volatility at 6.9%."

Beyond that, Basile reports that: "Additionally, valuations of Asian convertibles show they are trading at a discount to fair value, especially versus other regions, thus representing a sensible entry point for investors today. The general credit fundamentals are relatively strong, and yet the market is often under researched due to smaller issuance sizes. Given the majority of convertible buyers are from the long-only, large global funds this leaves an opportunity for a smaller dedicated regional convertible bond fund, especially as we have seen a significant pick up in Asia convertible issuance in recent years which we believe is set to continue."

RWC believes that the asset class continues to demonstrate advantages. The firm launched the RWC Asia Convertible Fund two years ago for investors who wanted exposure to the region via the convertible asset class. Since inception June 2011 to end October 2013 the fund has returned 7.9% with a volatility of 5.0%, again outperforming Asian equities by 3.2% with under a third of the volatility (MSCI Asia ex-Japan TR index had 18.7% volatility over the same period), as well as outperforming the UBS Asia Focus Convertible Bond Index which returned 4.9% over the period.

This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
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