Convertible Investment Study

Convertibles securities' hybrid structure has historically made for a compelling asset class in virtually any market environment. An outright allocation to convertible securities has the potential to provide investors with the best of all worlds – favorable asymmetry of returns through participation in upside momentum along with an important measure of downside protection.

We reviewed the average price of the ICE BofA U.S. Convertible Index ("VXA0") at every month-end since September 30, 2000, and the corresponding 1-year return performance following each period. The lower range of the VXA0's average price during the period historically offered significant positive forward one-year returns with double-digit returns on average. These lower price ranges indicated potentially strong entry points to invest in the convertibles market.

We believe the benefits offered by convertibles can be used in a variety of ways to diversify a portfolio and add value as a specific component of a strategic asset allocation. As a result, we generally recommend that a new allocation to convertible securities come from the high-yield or equity portion of an existing portfolio. There is also an added benefit of dampened volatility to the overall portfolio since convertibles typically do not move in perfect unison with stocks and bonds. Investors may also consider adding convertibles as part of their Alternative allocation given convertibles tend to be more highly correlated with equities and high-yield bonds, while offering low correlations to investment grade bonds.

About the Author
William W. Lee is managing director, senior portfolio manager of convertible securities at Palisade Capital Management. 
Allison J. Chase, CIPM, Vice President, Institutional Client Service & Marketing Analytics, at Palisade Capital Management, contributed to this article.
Palisade Capital Management is an Associate Member of TEXPERS. The views and opinions contained herein are those of the author and do not necessarily represent the views of Palisade nor TEXPERS. These views are subject to change.
Past performance is not a guarantee of future results. The information contained herein reflects the view of Palisade Capital Management, L.L.C. and its affiliates as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. All information provided in this commentary is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any presented data. In addition, there can be no guarantee that any projection, forecast or opinion will be realized. This white paper is confidential and for the use of the intended recipients only. It may not be reproduced, redistributed or copied in whole or in part for any purpose without the prior written consent of Palisade. This is not intended for distribution to, or use by, any party in any jurisdiction where such distribution or use would be contrary to local law or regulation. The ICE BofA U.S. Convertible Index (VXA0) is a capitalization weighted index consisting of convertible securities designed to represent the universe of U.S. corporate convertible securities. Index data presented herein uses the most recent estimates available. Index performance is shown strictly for the purpose of comparison between the Strategy and the VXA0. It is not possible to invest directly in the VXA0. The performance and volatility of the Strategy will be different than those of the VXA0. © 2022 Palisade Capital Management, L.L.C.


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