Convertible Bonds: A Strategic Allocation

Even a small strategic allocation to convertible bonds has historically improved the risk-return profile for investment portfolios, both multi-asset and pure fixed income portfolios.

In this paper, we examine how to incorporate convertible bonds into an investment portfolio from a strategic asset allocation standpoint. To this end, we explain the need for selecting the right convertible bond index exposure and also highlight how convertible bonds may be an option for insurers seeking equity-like returns but wishing to lower Solvency II capital requirements (SCR). To support our views, we conduct a risk attribution analysis for including convertible bonds in a multi-asset portfolio.