Is The Whole Greater Than The Sum Of The Parts?

December 15, 2020

In our recent Fixed Income: To Serve and Protect post, we highlighted that convertible bonds were largely overlooked despite being the top performer over the last two years when compared with U.S. equities, high yield and corporate bonds.¹ Over that period, convertible bonds outperformed equities and high yield by 9.4% and 16.0%, respectively.²

However, without disrespecting Aristotle, the whole isn’t always greater than the sum of the parts. Or as active investment managers tend to say, “It’s a market of bonds, not a bond market.”  In a market with US$88 billion in issuance,³ being selective when picking investments is key. Avoiding defaults and being prudent when assessing the quality and value of these debt instruments has the potential to drive much needed returns for investors. 

At Ewing Morris, we target convertible bonds through which we are not paying much for the embedded equity optionality.  This can be particularly attractive when, based on our research, a stock is extremely undervalued and the probability for equity appreciation is high.   We also target convertible bonds that may be “busted” or that simply carry a yield we believe is greater than is justified by the underlying credit risk.

12-month exposure of convertible bonds

In March this year, we took advantage of the Coronavirus-induced sell-off and started increasing our position in Canadian and U.S. listed converts within the Ewing Morris Flexible Fixed Income Fund. The Fund’s exposure is currently at 21.2%.⁴

With rates as low as they are, widening one’s cognitive aperture to continually find good investments is going to become critical to producing quality results over time. This dynamic plays to our advantage. Since the inception of the Fund in February 2016, we have been generating returns from a variety of fixed income sources.

For more information on our approach to convertible bonds within the Ewing Morris Flexible Fixed Income Fund, please contact us.

¹We compared the ICE BofA U.S. Convertible Excluding Mandatory Index with the S&P 500 Index, ICE BofA U.S. High Yield Index and ICE BofA U.S. Corporate Index, as these are widely known and used indices that represent fixed income and equity markets, from October 31, 2018 to October 31, 2020. Source: Capital IQ and Bloomberg. ²Source: Capital IQ and Bloomberg. ³ICE BofA All U.S. Convertibles Index issuance from January 1, 2020 to September 30, 2020. Source: BofA Global Research, ICE Data Indices. ⁴As of November 30, 2020.

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