The Hawksmoor multi-asset team is focusing on convertible bond funds within its range as they can give equity like returns but with far lower levels of volatility, with Richard Scott highlighting Davide Basile’s RWC Global Convertibles fund as one of his favourite vehicles for that exposure. 
Scott, who is a senior investment manager at the group, and his team have been very vocal over the past year or so about the problems facing investors thanks to a sustained period of rock-bottom interest rates and quantitative easing from the world’s central banks.
In fact, Scott’s colleague Ben Conway told FE Trustnet earlier this year that – thanks to the effect the added stimulus has had on valuations in and correlations between equity and bond markets – it’s never been harder to create a properly diversified multi-asset portfolio.
“You cannot lose sight of fact that the current environment is unprecedented. These are ridiculous times, absolutely ridiculous,” Conway said. “You have to take a step back and you shouldn’t listen to people who claim they know how markets will perform because no-one knows how it is going to pan out.”
Performance of indices since the global financial crisis
Source: FE Analytics
He added: “It’s never, ever been harder to build a diversified and cautious portfolio.”
Hawksmoor has therefore been moving away from traditional asset allocation models. For example, the team has been reducing its ‘beta’ within the portfolios given that most indices are richly valued and have therefore been focusing on funds which can generate alpha.
This has led them to convertible bond funds, which own assets that are issued as debt but can be ‘converted’ into equity at certain points in their life by the bondholder.
Scott says that as those assets can give equity-like upside but downside protection like fixed income, they are a very attractive area of the market to be in at this point in the cycle.
“We are still positive on convertibles and hold the RWC Global Convertibles fund. We expect our convertibles exposure to be a very long term holding, and are optimistic that the RWC will part of that,” Scott (pictured) said.
Davide Basile has managed the £1.1bn RWC Global Convertibles fund since January 2010.
According to FE Analytics, the fund has returned 27.94 per cent over five years meaning it has narrowly outperformed its Thomson Reuters Convertible Global Focus benchmark over the period in question.
As a point of comparison, the MSCI AC World index has gained 49.49 per cent. Nevertheless, the RWC fund has been half as volatile and had the half the maximum drawdown of the equity index over that time.
Performance of fund versus indices over 5yrs
Source: FE Analytics
The reason for that performance profile is due to years like 2015, where the fund has been able to eke out a higher return that equities without exposing investors to too large a fall.
Many market commentators expect volatility in equities and bonds to remain a persistent factor over the short to medium term as investors grapple with the uncertainty surrounding future interest rates, China’s slowdown and the fact that both asset classes have delivered very strong returns since the global financial crisis and are therefore expensive compared to their history.
As a result, Basile says convertibles are a useful option in the current environment.
“I think convertibles are a very nice tool for investors who are building a portfolio,” Basile said.
“These markets are very, very difficult as there are a lot of factors driving asset prices. This year we have had central bank intervention, political instability and some big sell-offs – it’s been very difficult.”
“But convertibles can give investors a smoother ride. They have automatic adjustment mechanisms, are lowly valued and are low duration.”
Basile says there are a number of factors why investors should consider convertibles.
As he points out, they tend to be low duration meaning that they aren’t overly sensitive to interest rate rises like large parts of the bond market.
On top of that, their ‘delta’ (or sensitivity to equity markets) isn’t static so as risk assets rise they become more equity like and when they fall they become more bond like.
A downside is that companies which issue convertible bonds tend to do so with a lower coupon than they would if they were issuing traditional credit. In fact, the RWC fund only offers accumulation units rather than producing a yield.
Nevertheless, as the graph below shows, the fund has come into its own this year while both bond and equity markets have faced a multitude of headwinds.
Performance of fund versus indices in 2015
Source: FE Analytics
Of course, one of the major concerns facing investors is the chance of a double sell-off in both bond and equity markets, given the increasing correlations between the two asset classes.
Many fear such an event would occur if and when interest rates start to rise in the US, with many suggesting a similar outcome to the pan-asset class sell-off in 1994.
Basile points out that the fund is unlikely to perform well in such an environment, though. This is backed up by RWC Global Convertibles losses during the ‘taper tantrum’ in mid-2013 when the US Federal Reserve first warned the market it would reduce quantitative easing.
Performance of fund versus indices during the ‘taper tantrum’
Source: FE Analytics
However, Basile says a similar event is unlikely to happen when the Fed does start raising rates as a hike is now well-priced in, any move higher is likely to incremental and would happen due to an improvement in the economy rather than a panicked move to combat raging inflation.
He also points out that the asset class has other positives going for it, such as liquidity.
While investors have been warned about diminishing levels of liquidity in the corporate bond market as the market has grown but investment banks have stepped back from their traditional ‘market maker’ role due to tighter regulations, Basile was able to trade €1bn worth of convertibles during the correction in August.
He says one of the reasons for this is due to convertibles characteristics as if their delta is high he can sell to equity managers, if the delta is low they can sell to bond managers and if it is neutral he can sell to other managers in his space.
RWC Global Convertibles has an ongoing charges figure (OCF) of 1.05 per cent.
