MFM Convertible Bonds Opportunities

What happened
Fears about the spread of the coronavirus epidemic, covid-19, shook the financial markets to the core. After anticipating that the economic impact of the epidemic would be confined to China and the supply chains that depend on Chinese production, investors repositioned themselves. They fear a weakening of corporate profits and a significant slowdown in global growth. Stocks endured one of their most significant declines since the financial crisis of 2008, with many indices losing more than 10% in less than a week. This meaningful correction was surprisingly rapid.
In this complicated environment, and even without a strong spread widenings in the credit side, the behaviour of convertible bonds was exemplary compared to other asset classes. Based on Refinitv Global Focus Convertible indices (ex-Thomson Reuters), Asia-Ex is the only region in positive territory this month at +0.93%. The US is at -2.22%, Japan at -1.99% and Europe at -1.12%. The Global Focus index finished the month at -1.52% and the Global Focus Investment Grade at -0.74%. We are happy to emphasize the resilient convertible bonds performances compared to equity indices. Most of them posted a performance well below -8% on the month, as MSCI World, S&P or Euro Stoxx 50. It remarkably illustrates the benefit of the natural convexity offered by convertible bonds during a period of high stress on markets.

MFM Global Convertible Bonds (CHF-I class) returned -1.06% against its benchmark at -0.94%.
In relative terms, our overweight in European Real Estate and Japanese Industrials cost us the most. It was significantly offset by our overweight and better selection in Asia-Ex, like for example Bharti Airtel. The only positive region was Asia-Ex, pushed by our positions in Education sector. Au contraire, Europe was particularly under pressure as the virus started to spread in Italy and France, while investors took profit massively in the US, especially in Information Technology after a strong beginning of the year, reaching record highs for years.
In the portfolio, we have actively and timely reduced our equity exposure and investment premium. We took profit on names such as Zillow (US, Communication Services), Square (US, Information Technology) and Semiconductor Manufacturing (Asia-ex, Information Technology) as all benefited from strong earnings announcement. In this harsh market's conditions, we took advantage of nice opportunities to rebalance the portfolio, favoring convex names in defensive sectors, like for example National Grid (Europe, Utilities) and Covivio (Europe, Real Estate). As we took profit in several names, it naturally increased the cash and consequently reduced the overall risk of the portfolio and being ready for seizing further opportunities.


MFM Convertible Bonds Opportunities (EUR-I class) returned -1.10% against its benchmark at -1.51%.
In relative terms, the significative outperformance came from a better selection in the US through our equity plays, like for example Tesla, Zillow and Dexcom, all pushed by strong earnings, as well as our overweight in Bharti Airtel (Communication Services) and Wuxi AppTec (Healthcare) in Asia-Ex. In addition, we had positive contributions from our gamma play like United Microelectronics (Information Technology).
In the portfolio, we actively reduced our equity exposure and investment premium by taking partial profit in equity plays like Minebea Mitsumi (Japan, Industrials) and Dexcom (US, Information Technology), and in the gamma play United Microelectronics (Taiwan, Information Technology). We took full profit in the equity play Tesla (US, Consumer Discretionary) following strong earnings from the company and a stratospheric performance of the underlying. We rebalanced the portfolio to increase even more its convexity investing in names with high gamma like Rag/Evonik (Europe, Materials) and LG Chem (Asia-ex, Materials).


What's next
Fears about the economic impact of the pandemic will undoubtedly remain present both in terms of global growth and increased corporate profits. The intervention of central bankers will offset the short-term financial implications. However, the degree of uncertainty is likely to remain high linked to US election and pandemic development. The impact on the financial markets will undoubtedly be increased volatility in most asset classes.
This situation is probably the most optimal one to reconsider an overweight position in such a convex asset class like convertible bonds. As a matter of fact, this sharp correction has allowed us to benefit from valuable opportunities in both our convertibles funds. Our more defensive solution, the Global Convertible Bonds Fund, exhibits a profile with low equity exposure, close to its bond floor offering a quasi-optimal convexity, with the lowest drawdown in tough markets. This profile is enabling this fund to work his way through the higher-volatility regime that we are now facing. Its convexity should bring a positive and consistent contribution to its performances in volatile markets, while remaining one of the few funds to keep such a high credit quality (BBB+). Our more dynamic fund, the Convertible Bonds Opportunities, has also increased further its diversification in the core with new convertible bonds. In this environment, we will continue to seek opportunities in equity plays to benefit from attractive entry points as well as in the most convex names to populate our gamma plays.
Interestingly, despite the markets' conditions, we have seen a healthy primary market, especially in the US, with several billion dollars issued. We expect it to continue and bring further liquidity to the convertible bonds asset class.