The future looks bright for convertibles, so time to put the top down

Fidelity's Adam Kramer believes the time has come to take a close look at convertible bonds, a category he considers more enticing than it has been in years.

• After a prolonged period of limited new-issue supply, the market for convertible bonds is experiencing a resurgence, says Fidelity Portfolio Manager Adam Kramer, who is drawn to these securities for what he views as unique advantages compared to traditional equities.
• "In the next two years, about one-third of the convertibles market will mature and leave the ICE BofA^® All US Convertibles Index," reveals Kramer, who helms Fidelity Advisor^® Multi-Asset Income Fund. "This shift is creating a wave of new opportunities for investors as these securities are replaced with newly issued bonds."
• In running this flexible income-oriented strategy, Kramer invests tactically across a broad spectrum of income-producing securities, including a non-benchmark allocation to convertible bonds, which represented about 14% of assets on November 30, a meaningful increase from less than 1% at the beginning of 2024.
• Additionally, as new convertible bonds have come to market, Kramer and the fund's co-managers have relied heavily on Fidelity's research capabilities to create value through individual security selection, while working collaboratively to choose the optimal combination of securities, reflective of market conditions, in seeking to balance income potential versus risk.
• "In today's market, we are seeing an uptick in 'total-return' convertibles, that is, those with equity sensitivity between 40% and 80%," Kramer explains. "That's the sweet spot where I'm finding the most compelling opportunities as new deals become available."
• He points out that due to their conversion feature, convertibles provide a sizable portion of stocks' total-return upside, but with far less volatility since they are bonds.
• When new issues come to market, Kramer routinely looks for those he feels have the potential to either double or triple in value. He notes that while such gains are not the norm, the appreciation potential of convertibles is part of what makes them intriguing.
• "To that point, a select few — Tesla and Nvidia, for example — went up ten- and twelvefold, respectively, dating back to 2013," highlights Kramer. "What other bonds could you say that about?" he asks.
• Other compelling convertible bonds that have recently earned a place in the portfolio as of November 30 include beleaguered aerospace and defense giant Boeing, as it seeks to repair its balance sheet following several high-profile missteps, Kramer notes.
• He also cites MicroStrategy, a software company with a valuation that has become closely tied to the price of bitcoin, as it offers both an indirect and lower-risk means of gaining exposure to the cryptocurrency.
• "When investing in the convertibles market, our aim is to 'do more with less' — generate an equity-like return but with less volatility and stock-specific risk — therefore creating meaningful value for the fund," Kramer concludes.