GLOBAL - Pension funds are increasing their exposures or considering an entry into the convertible bond market as they try to take advantage of these underpriced securities, industry figures say.
Mercer has been promoting the strategy to its clients since the first quarter. Meanwhile, managers in the UK and the US say interest and flows from institutional investors, including pension funds, has multiplied since the start of the year. The industry has also seen pension funds, like the State of Oregon Public Employees Retirement System, re-entering the market for the first time in years.
Office of the State Treasurer of Oregon spokesman James Sinks said: "We had a portfolio for many years that was housed in our equity portfolio. It was terminated a couple of years ago because it was a drag on equity performance."
He added: "This is a tactical move based on the distressed markets right now."
"This is a market that is underpriced," said Mercer worldwide partner in London Nick Sykes. "A long term view is that you can get close to equity return with less downside volatility," he added.
Those who moved in December or early this year scooped up convertibles at their most depressed levels after hedge funds were forced to shed these securities. Despite the market rebound, experts in the industry still say opportunities exist.
Morgan Stanley Investment Management convertible bond manager Davide Basile said: "We measure implied volatility of convertibles versus the volatility of the underlying stock, these two should be equal or the implied volatility of converts should greater, currently however implied volatility of convertibles in percentage terms is about 15 percentage points lower," he said.
Still a discount, though not the 50 percentage points lower it had been in December.
According to data by UBS, globally, there was one issuance between October 2008 and the end of February 2009. There were 147 issuances in the following five months.
Convertibles fund manager at Aviva Investors in London Tom Wills said the UK convertible bond market is also picking up after years of stagnation. "In the UK, we had very few issuances in the past 10 years. Now there've been several just this year. That helps," he said.
However, Redington Partners founding partner Robert Gardner said: "From our perspective, our concerns are the depth of the market, what types of issuers come to the convertibles market and the composition of credit and equity risk.
"If you want to make an investment in an asset class, you want to see a number of issuers. Having blue chip names helps, but you want to see a couple of hundred for diversification purposes."
To read more about pension fund activity in the convertible bond market, click here.
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