Higher-quality asset class with good fundamentals
While we acknowledge much of the convertible bond market remains unrated, our research indicates the average credit rating of the market is BB. Additionally, we saw increasing investment-grade-rated issuance in 2024, which we believe could provide the market with stronger insulation in a downside scenario. From a fundamental perspective, corporate earnings remain relatively strong, and we believe corporate fundamentals are relatively safeguarded from the potential impact of a shift to tighter monetary policy. The environment remains ripe for buybacks and is increasingly favorable for M&A activity, which can be an opportunity for convertibles given the equity upside participation.
Exposure to growth-oriented sectors
Convertible bonds offer exposure to “secular winners” and industry leaders, which continue to benefit from innovation and growth. For example, the global convertible bond market is weighted toward more growth-oriented sectors, such as technology, financials, health care, and internet and data — sectors not well represented in the traditional corporate universe. The asset class provides the opportunity to gain upside exposure to major themes like cybersecurity, AI, and health care innovation.
We continue to make the case for convertible bonds
Overall, we believe 2025 is shaping up to be another strong year for convertible bonds. We continue to see a compelling case for the asset class on a stand-alone basis or as a diversifying component of a broader fixed-income allocation. Recently, we’ve seen heightened volatility as disruption in AI has resulted in increased dispersion, providing greater opportunities to add value through credit selection. Going forward, we believe a reasonable yield combined with equity participation, potentially aided by prudent security selection, could generate an attractive total return for a convertible bond allocation in 2025.
