基金经理访谈 | 在市场波动中捕捉亚洲可转债的投资机会

来源:投资洞见与委托 作者:投资洞见与委托 发布时间: 8月前

图片来源：Shutterstock

光大可转债机会基金 (The Everbright Convertible Opportunities Fund，「ECOF」)是中国光大资产管理有限公司 (「光大资管」) 的旗舰对冲基金。

该基金拥有十年的优异业绩记录：自 2014 年推出以来产生了超过 100% 的费后净回报，尤其是在过去三年 (2021-2023)，该基金的美元计价年化回报超过 20%，而同期受美国加息和新兴市场通胀上升的影响，亚洲主要信贷指数则普遍录得 4%-10% 的负回报。

凭借出色的表现，ECOF 多年来获奖无数，最新的得奖记录是在《投资洞见与委托》(I&M) 2024 年度专业投资大奖评选中，包揽了亚洲 (除日本) 最佳对冲基金固定收益策略三年、五年、十年大奖，以及亚洲 (除日本) 最佳对冲基金多策略五年和十年大奖。而该基金的基金经理、光大资管董事总经理兼固定收益及可转债主管 Girish Kumarguru 也当选为香港市场及亚洲地区固定收益类别的年度明星经理人。

为此，I&M 对 Girish Kumarguru 进行了专访，听一听这位在亚洲可转债市场和信贷策略上拥有逾 20 年丰富经验的投资经理分享他的可转债投资方法、组合表现出色的驱动因素以及面向不同投资者群体的适合度考虑。

访谈以英文进行。以下是访谈内容。

The Investment Case for Asian Convertible Bond Funds amidst Market Volatility

The Everbright Convertible Opportunities Fund (ECOF) is the flagship hedge fund of China Everbright Asset Management Limited (CEAM). 

With a successful track record of ten years, the portfolio generated over 100% net return (net of fees) since its launch in 2014. In particular, over the last three years (2021-23), the fund delivered over 20% in USD terms net of fees(1) while the major Asian credit indices(2) recorded negative returns of ~4-10%, impacted by rising inflation and interest rate hikes in US and emerging markets. 

This outstanding performance has led to the Everbright Convertible Opportunities Fund receiving multiple awards, including Best Asian ex-Japan Hedge Fund (Five Years), Best Asian ex-Japan Fixed Income Hedge Fund (Three Years) and Best Asian ex-Japan Fixed Income Fund (Five Years) in the Insights & Mandate (I&M) Investment Awards 2023. In 2022, the fund bagged the I&M's Best Hedge Fund (Three Years) and I&M's Best Hedge Fund (Five Years). ECOF has received awards and nominations in different awards categories over the years. 

I&M sat down with the fund's portfolio manager, Girish Kumarguru, Managing Director and Head of Fixed Income and Convertible Bonds in CEAM, an investment veteran with more than 20 years of experience in Asian Convertible Bond (CB) and credit strategies, to discuss the Asian CB market, advantages of convertible bonds for investors and for issuers, his approach to investment in Asian converts, drivers of the portfolio's outperformance, and its suitability for a diverse group of investors.  

Girish Kumarguru (图片来源：光大资管)

I&M: Hi Girish, could you start please by telling us about the Asian CB market. How large is it in global terms, its main features, and what activity has been like recently?

Girish Kumarguru (GK): Asia including Japan represents approximately 10% to 12% of the global convertible bond universe in terms of market value of bonds outstanding. The US is a large mature market accounting for approx. 70% of global convertibles, with Europe accounting for approx. 20%.

Asian convertibles provide opportunity for investors to participate in growth across different countries and sectors in Asia. The key geographies for convertible bonds in the offshore market include Hong Kong, Taiwan, South Korea, Singapore, and Japan. Convertible bond issuance is well diversified across sectors – including information technology, consumer discretionary, financials, industrials, real estate, healthcare, materials, and others. So, investing in a portfolio of Asian convertible bonds provides investors with an opportunity to participate in growth through owning long dated equity options across countries and sectors. In recent years, several first-time issuers have tapped the convertible bond market thus improving the breadth of the market. 

Asian convertible bond universe includes several healthy credit quality issuers. The investment grade issuers, especially in the A and BBB issuer rating categories, represent a sizeable part of the outstanding offshore convertible bonds. This segment is a sweet spot for us to invest in Asian CBs, as we are comfortable with the credit risk of these issuers. Some of these convertible bonds offer a decent yield for issuers having an acceptable credit quality and provides an opportunity to participate in equity upside. 

Many large Asian convertible bonds issues have good market liquidity for trading in the secondary market. This is unlike high yield bonds, where the bid offer spreads can widen significantly, and liquidity can dry up under volatile market conditions.

We see value in Asian convertible bonds many of which model inexpensive to their intrinsic or fair value, thus being attractive investment opportunities. Moreover, select Asian convertible bonds offer relative value compared to outstanding fixed income instruments of the same issuer.  There have been several instances when Asian convertible bonds provide higher yield and wider credit spread, for similar or shorter duration vis-à-vis fixed income instruments of the same issuer, thus making it an attractive proposition even for fixed income investors. There are, from time to time, some out-of-the-money CBs that trade below their 'fixed income value', what is termed as the 'bond floor' of the convertible bond, thus providing an opportunity to the CB investor to own a free long dated out-of-money equity option. 

There has been some a structural shift in investor base of Asian converts in recent years due to increased market volatility. As a result, long-only convertible funds now account for about 50% of the Asian CB investors, down from around 60%, while hedge fund investment in CBs has risen from about 30% to about 40%. Moreover, the market has witnessed increased interest from credit funds, who see value in Asian convertibles vis-à-vis fixed income of the same issuer, particularly in out-of-the-money CBs. 

I&M: You've mentioned out-of-the money CBs there. Can you tell us a bit more about the various profiles of convertible bonds, and what the appeal of the other profiles are?

GK: Convertible bonds can be classified as out-of-money CBs, at-the-money CBs, and in-the-money CBs, depending on where the current stock price is vis-à-vis the conversion price of the CB. Out-of-money (OTM) convertibles have stock price below the conversion price, at-the-money has stock price equal to the conversion price, and in-the-money convertibles have equity price higher than the conversion price. 

Deep OTM convertibles behave like fixed income instruments. Additionally, though the investors can benefit from owing a deep OTM equity option that may have value if underlying equity rallies significantly. 'Balanced convertibles' are those where the convertible bond offers a 'convex' return profile, i.e., they provide asymmetric upside vis-à-vis limited downside, which makes them an attractive investment. In many instances, such convex return profile CBs generate higher risk adjusted return vis-à-vis other asset classes. Should the underlying equity price decline, as long as the issuer's credit quality is healthy (say, investment grade credit), the downside for the investor is limited owing to the fixed income nature of the bond, which provides a floor on the bond price. 

Balanced convertible bonds also provide an opportunity for convertible arbitrage strategy, where the investor hedges the underlying equity risk component of the convertible bond and generates steady returns by trading the underlying equity benefiting from the equity volatility.  

I&M: And how are these benefits of CBs for investors holding up in current market conditions?

GK: Asian convertible bond valuations have been resilient and held up pretty well during market volatility. Despite subdued equity prices for equities offshore, CB valuations have been steady, particularly for CBs of investment grade quality issuers. This is attributable to a few reasons - strong bond floor (or fixed income value) of the CB; the relative value the CBs had vis-à-vis the fixed income instrument of the same issuer, relatively low duration of CBs vis-à-vis fixed income instrument, and modest equity sensitivity of the convertible bond. Increased equity volatility helps to support fair value of the convertible bond since the value of the embedded equity option in the convertible bond increases.  In case of Japan convertibles, CB valuations have held up well due to increased interest of investor in Japan. 

When one invests in convertible bonds at subdued equity prices, there is opportunity for upside when equities rally. As for new CB issuances, we have seen that convertible bonds issued in weak markets tend to benefit from issuers willing to provide better terms for the convertible bond, which benefits the investor.

I&M: And on the other side, what is motivating companies in Asia to issue CBs?

GK: The motivation for companies to issue convertible bonds are varied. Since the convertible bond investor is essentially buying a long-dated embedded equity call option, the issuer is able to price the convertible bond with a lower overall yield vis-à-vis where a fixed income instrument would price; this helps the issuer save on interest expenses. The ability to lower financing costs is particularly attractive in high interest rate environment. Sometimes, growth companies, mid-cap issuers, etc., may not get their desired credit rating to enable them to economically access the fixed income market. Convertible bonds are used by growth companies to raise capital at a premium to where the equity trades. There is no immediate equity dilution for the issuer, with dilution happening only when the convertible bond is converted to equity. The call feature available with issuers in convertible securities enables the company to call the bond when the equity price is above the softcall price, thus increasing equity base and improving the gearing ratios for the issuer. Issuance of convertible bonds typically results in a smaller decline in equity price when announced vis-à-vis other forms of equity raising. 

Some issuers who own equity of another company can issue exchangeable bonds. Here, the credit risk is on the issuer, while the bond is convertible into equity of the underlying company. This provides an opportunity for the issuer to monetize its equity stake in underlying company at a premium. 

I&M: We understand that the fund has a diversified portfolio of convertible bonds across Asia including Japan. What are some of the geographies and sectors that you invest in?  Where do you see more issuances coming from this year? 

GK: As an Asia focused convertible bond fund, we allocate capital across countries, where we see value. We have investments in convertible bonds across Japan, Hong Kong, South Korea, Singapore, etc. 

That said, we expect more issuance out of countries where the equities have had a good run. Japan has been an attractive convertible bond market; the market has witnessed increased convertible issuances from Japan over the last six months. Issuers in Japan are issuing convertible bonds for diverse reasons including to fund share buybacks, acquisitions, and for their capex needs.  

In terms of sectors, technology including internet forms a significant part of the Asia ex-Japan convertible investment universe, whereas Japan has sizeable issuances from materials and industrial companies. Apart from technology, the Asian convertible universe includes consumer discretionary, healthcare, industrials, financials, and materials. 

I&M: How did you manage to generate outperformance while Asia markets faced headwinds due to rising interest rates and a strong USD over the past couple of years?

GK: Increased allocation to convertible arbitrage strategy helped generate returns during recent volatile market conditions. The equity short position provides a suitable hedge to the strategy, cushioning volatility in returns. Hedging of credit risk and equity risk in convertibles supported returns. Tail risk hedge (macrohedges) also helped to cushion volatility in portfolio returns. 

The key objective for the fund is to own a portfolio of inexpensive long dated equity options through convertible bonds. We have been focused on convertibles that exhibit 'convexity' – those that will participate in equity upside in markets, and have lower downside if equities decline.

Specific equity themes in Asia have helped generate healthy returns. For instance, the reopening theme – invested through convertible bonds of airline equities have outperformed market expectations. The electric vehicle supply chain investments in Korea provided asymmetric upside for the portfolio. 

In specific instances, we deployed CBs to create effective portfolio hedges using a 'synthetic put' strategy - where a combination of long CB and short equity position in deep in-the-money CB acts as a put option. 

I&M: Can you tell us more about the hedging philosophy and how you execute this?

GK: As a fund which targets absolute returns, portfolio hedging forms a key part of our strategy. The fund maintains low net exposure, by sourcing a suite of inexpensive macrohedges for the portfolio. 

We hedge currency risk and tactically hedge interest rate risk. Tail risk hedging is implemented to protect portfolio returns during periods of market volatility. Maintaining a significant allocation to convertible bonds issued by investment grade quality issuers makes the portfolio resilient during market selloffs. Moreover, we hedge credit risk on specific issuers where we can source credit protection economically. This enables the fund to own a long-dated equity option, without taking issuer specific credit risk. Credit hedging through inexpensive hedges, especially in Japan, has helped mitigate overall portfolio risk, and helped the portfolio to own long dated options.

Investing in complementary convertible strategies, viz., outright CBs (for owning equity optionality), convertible arbitrage, and synthetic puts using CBs, ensures the fund has different strategies which tend to perform well under different market conditions. Convertible arbitrage tends to do well under volatile market conditions, as increased equity volatility supports the valuation of the convertible bond, while the market volatility opens up more opportunities for trading the equity hedge against the convertible bond. Convertible arbitrage strategy involves taking a long position in the convertible bond, while hedging the equity market risk to structure an equity market neutral strategy.  

I&M: Thank you Girish. Before we leave, could you briefly describe the appeal of your fund and the kind of investors it is suitable for? 

GK: We aim to generate absolute returns of 10% to 15% net of all fees, year after year in diverse market conditions.  Convertible bonds have proved to be a suitable asset class for achieving this objective.

Since inception, the fund has outperformed Asian investment grade as well as Asian high-yield credit indices by a comfortable margin. More importantly, this has been achieved while maintaining the portfolio defensively positioned, by maintaining low net exposure. Diversified income streams through above discussed sub-strategies have enabled the fund to achieve absolute returns with overall lower risk. 

Being a fund which is a 'long' volatility through convertible bonds, fund performance is expected to be resilient in volatile markets. Convertible arbitrage strategy tends to do well during periods of elevated market volatility. 

Given multiple macro risks in global markets including – increased geopolitical uncertainty, tepid global growth, quantitative tightening, high debt levels etc; in our opinion, well managed absolute return strategies with low net exposure and significant level of hedging should demonstrate resilience in delivering returns. 

Everbright Convertible Opportunities Fund should appeal to investors who want to invest in a strategy which targets absolute return with a healthy Sharpe ratio, has good fund liquidity, and adopts a market neutral strategy. It should appeal to investors who aim to benefit from growth across Asian markets, while maintaining portfolio convexity. The Fund has delivered healthy absolute returns with a long, audited track record. It can be a good fit for institutional investors and allocators like funds of funds that seek absolute returns. We believe that investing in a diversified convertible bond strategy should also appeal to high networth investors, who alternatively may own corporate bonds taking concentrated single issuer risk. We are open to running dedicated customized portfolios or managed accounts for institutional investors including multi-family offices.

(1) Source: China Everbright Assets Management Limited and fund administrator, as of 31/12/2023.

(2) Reference: ICE BofA Asian Dollar High Yield Corporate Index, ICE BofA Asian Dollar Investment Grade Bond Index, The ICE BofA Asian Dollar Index

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Disclaimer

This document has been reviewed by China Everbright Assets Management Limited (“CEAM”) for initial informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security nor does it constitute an offer or solicitation in any jurisdiction in which such an offer or solicitation is not authorized or to whom it is unlawful to make such solicitation or offer. Recipients are required to keep this document and the information contained in it confidential and not to copy or disclose it or any part of it to any other person. This document has been prepared without taking into account any person’s objectives, financial situation or needs. 

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