Equity and Bond Exposure of Convertible Bond Funds: Region Matters

Abstract

This paper shows that the characteristics of convertible bond funds (CBFs) differ considerably based on the regional asset allocation of the fund. More specifically, U.S. CBF returns correlate more strongly with equity returns, while European and Asian CBFs returns show a higher correlation with bond returns. This is a consequence of the finding that U.S. convertibles are more equity-like in nature than European and Asian convertibles, which are constructed more like a bond. Moreover, we show that global CBFs have different characteristics depending on the nationality of the asset management company. A global CBF managed by a European (U.S.) asset management firm exhibits more bond (equity) like features because portfolio managers tend to compose home biased portfolios. Our results have important repercussions for both investors and researchers, as the characteristics of a convertible bond fund will differ, not only based on the regional asset allocation of the fund, but also based on the domicile of the asset management firm. Thus, the performance of the fund and its correlation with other assets may turn out to be different from the investor’s ex ante expectations and expectations of fund managers and clients risk to be divergent.

Keywords: Convertible bond funds, regional factors, risk factors

JEL Classification: C23, G15, G23