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“Hi, my name is James Dinsmore and I am a portfolio manager for the convertible strategies here at Gabelli.
I wanted to talk about what we have been seeing in the convertible market during this unprecedented time. Convertibles had their best 5 months as an asset class since Barclays has been tracking data going back to 2003. This was driven by three specific factors – the social distancing trade, the recovery trade, and Tesla. The convertible market came into the year with significant exposure to companies that benefit from social distancing. Software companies that enable Telehealth, remote learning, security, communication, and collaboration abound in our market and many have seen significant demand growth as companies and consumers are quickly shifting to an online environment. We expect this demand to continue, and the new customers to be a great source of recurring revenues for many of these companies for years to come.
Issuance has also been an important part of the convertible story in 2020. We are on pace for the most issuance in decades as companies staring down an unknown period of zero revenues look to extend liquidity and shore up balance sheets. Many companies in the retail and travel sectors fit this mold. Investors were eager to purchase bonds that gave them healthy yields, low premiums and the opportunity to participate in a recovering economy while moving up in the capital structure. We have seen more issuance in the first half of 2020 than we saw in all of 2019. This has grown the market to over $300 Billion with an increasingly diverse mix of issues. We expect this issuance to continue as companies take advantage of the low interest rates and minimal dilution that convertibles can provide. This is a great environment for them to refinance any higher priced debt, and we welcome the issuance as a way to provide risk adjusted equity exposure and total returns through income and capital appreciation to our clients.
Finally, Tesla now makes up nearly 8% of the convertible market, and accounts for half of convertibles’ impressive performance YTD. While we have owned Tesla in the past and believe the convertibles are still the best way to have exposure to the name, the volatility of this one name could continue to have an outsized impact on our market both positively and negatively.
We believe convertibles offer an attractive risk return profile in many market environments. Historically they outperform in flat and down markets due to the yield and maturity, while they participate in rising markets due to the embedded equity option. This leads to performance over time that is in line with equity markets with three quarters of the volatility.”
