are convertible bonds really attractive? alain eckmann, cfa international investment italian forum...
TRANSCRIPT
Are convertible bonds really attractive?
Alain Eckmann, CFA
International Investment Italian Forum
November 8th, 2007
2International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Table of Contents
SECTION 1 Convertibles an attractive investment!?
2
SECTION 2 The global convertible bond market
5
SECTION 3 Will convertible bonds stay attractive?
9
SECTION 4 Conclusion
18
SECTION 1
Convertibles an attractive investment!?
4International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Attractive risk/return attributesGlobal convertibles hedged in EUR 1994 – 2007
* Internal calculationsPast performance is no guarantee of future trends.
Source: Datastream, Bloomberg, UBS.Data as of August 31, 2007.
8.4%9.5%
5.9%
3.5%
13.8%
8.4%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
Return in % Risk in %
Convertibles (UBS Global Convertible Index - Global Vanilla Hedged (EUR))
Equities (MSCI World Total Return Hedged (EUR)* )
Bonds (JPM GBI Global Hedged (EUR)*)
5International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
But is the future always like the past? Unfortunately asset allocation is more complicated than
that
Nasdaq Composite Index 1994-2007
0
1000
2000
3000
4000
5000
600001
.199
4
01.1
995
01.1
996
01.1
997
01.1
998
01.1
999
01.2
000
01.2
001
01.2
002
01.2
003
01.2
004
01.2
005
01.2
006
01.2
007
Average return to March 2000
35% p.a.
Average return from March
2000 -8% p.a.
SECTION 2
The global convertible bond market
7International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Global Convertible Bond Issuance 1995-2007Growing global issuance, but with mixed regional themes
0
50
100
150
200
250
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(Ann.)
US$
bn
US Europe Asia ex-Japan Japan OtherSource: UBS AG, MACE Advisors.Data as of August 31, 2007.
8International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Global convertible bond universe size
Source: UBS AG, MACE Advisors.Datas as of December 31, 2006.
Region USD billions Number of convertible bonds
US 312 1 050
Europe 153 428
Japan 62 351
Asia ex-Japan 62 555
Other 24 183
Total 613 2 567
9International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Global convertible bond sectors
Source: UBS AG, MACE Advisors, Datastream.Datas as of December 31, 2006.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 MSCIWorld
Other Financials Pharmaceutical Retail Utility Electronics Industrial Telecom
SECTION 3
Will convertible bonds stay attractive?
11International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Convertible bonds give exposure to…
Equity markets
Credit markets
Interest rates changes
Volatility changes
Exposure to all these factors can also be taken on a stand alone basis
The convertible bond asset class offers more than the sum of the above and
has therefore a very attractive risk/reward profile
But
12International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Main performance drivers of convertible bonds
Convertible bond
Bond content Prospectus
Correlation
Equity content
Issuance behaviour
& valuation
Duration exposure
Credit exposure
FX exposure
Volatility exposure
Equity exposure
More than the sum of classical performance drivers
13International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Equity markets versus convertible bond implied volatility*
Source: UBS AG, MACE Advisors.Datas as of December 31, 2006.* We refer here to the European market, as the longest-running time series of average implied volatilities happens to be available for this particular market (as proxied by the UBS Convertible Bond Index).
Avera
ge im
plied
vola
tility
Wealt
h I
nd
ex
0
5
10
15
20
25
30
35
40
45
50
19
/05
/20
00
19
/08
/20
00
19
/11
/20
00
19
/02
/20
01
19
/05
/20
01
19
/08
/20
01
19
/11
/20
01
19
/02
/20
02
19
/05
/20
02
19
/08
/20
02
19
/11
/20
02
19
/02
/20
03
19
/05
/20
03
19
/08
/20
03
19
/11
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03
19
/02
/20
04
19
/05
/20
04
19
/08
/20
04
19
/11
/20
04
19
/02
/20
05
19
/05
/20
05
19
/08
/20
05
19
/11
/20
05
19
/02
/20
06
19
/05
/20
06
19
/08
/20
06
19
/11
/20
06
100
150
200
250
300
350
UBS Convertible Bond Index - Eurozone (EUR) Average Implied Volatility (LHS) MSCI EMU (RHS)
14International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Why convertible bonds cannot be replicated
Bond as exchange property
Better investor protection in comparison to traditional options
Optionality for companies where there is no liquid option market
Recurrent value added due to suboptimal call exercises by issuers
15International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Cheap issuance
Source: Lehman BrothersDatas as of December 31, 2006.
Average cheapness of US convertible bond new issues
4,1
2,51
2,92
1,69
2,06
2,3
1,26
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
4,00
4,50
2000 2001 2002 2003 2004 2005 2006
Perc
en
tag
e o
f ch
eap
ness
16International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Cheap issuance
Source: SDC, Datastream, Lehman Brothers, MACE Advisors, UBS AG.Datas as of December 31, 2004.
New issuance as a percentage of market capitalization
0,8% 1,1% 1,4% 1,4% 1,5%2,4% 2,0% 1,7% 1,6% 1,6%
10,9%
21,6%
18,1%
19,8%
17,8%
26,2%
32,8%
18,5%
26,6%
17,4%
0%
5%
10%
15%
20%
25%
30%
35%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Issu
an
ce a
s a
perc
en
tag
e o
f M
ark
et
Cap
italz
ati
on
Equities Convertible Bonds
17International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Benefits of high borrow cost
Source: Bloomberg.Datas as of December 31, 2006.
Theoretical value of General Motors $6.25 2033 for various levels of lending fees
17,35
17,16
16,99
16,83
16,69
16,00
16,20
16,40
16,60
16,80
17,00
17,20
17,40
17,60
17,80
18,00
1,0% 2,0% 3,0% 4,0% 5,0%
Annual Stock Borrow
Th
eore
tical V
alu
e in
US
D
SECTION 4
Conclusion
19International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Recurrent value added due to under-priced new issues
Recurrent value added due to suboptimal call exercises by issuers
Very good protection of optionality against corporate actions (takeover, dividends)
Optionality often priced with high stock borrow which favours outright investors (as else it wouldn’t work for hedge funds)
Exposure to correlation (the bond value is the exchange property)
Can not be replicated with other asset classes
Attractive risk/reward
Convertible arbitrage a very successful hedge fund strategy
ConclusionConvertible bonds are an attractive asset class
20International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Attractive convertible bonds…might be something for you?
21International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Alain Eckmann, CFA
Alain Eckmann is a Senior Portfolio Manager within the Asymmetric Portfolio Solutions team. He is responsible worldwide for the convertible bond capability within UBS Global AM, which he helped to build up.
Alain joined the Asymmetric Portfolio Solutions team in 1997. His responsibilities included managing and enhancing the capabilities offered (capital preservations, currency overlay, Dynamic Alpha), and developing tailored client solutions.
During his studies, Alain worked for a private bank in Geneva, dealing with quantitative questions in asset management. After graduation, he built up a risk-management/risk-controlling department at Julius Baer in Zurich, developing mathematical methods to quantify market risks (VaR, etc).
Alain is co-author of the publications Exotic Options: A guide through the jungle of financial innovations, and The benefits of convertible bonds and is a regular speaker at international conferences. In addition, he is a member of the Swiss CFA Society and of the CFA Institute.
Years of investment industry experience: 13
Education: University of Geneva (Switzerland), dipl.
Senior Portfolio ManagerExecutive Director
22International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.
Disclaimer For marketing and information purposes by UBS.
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November 2007