U.S. and European institutions investing in convertible securities tend to have the same amount invested on average, but use different portfolio strategies and (in the case of hedge funds at least) use different leverage ratios. These are key findings of an early 2003 study by Greenwich Associates.
“In terms of market participants, it is noteworthy that hedge-fund investors, who tend to be more active traders and buyers, have become a larger part of the mix,” Greenwich Associates consultant John Feng notes.
67% of U.S. and 70% of European convertible investors interviewed identify hedging as their predominant convertible investment strategy. 14% of U.S. and 4% of European convertible investors invest via outright equity-oriented strategies, compared with 14% of U.S. and 24% of European institutions reporting they invest via outright dedicated convertible funds. Few say they employ a fixed-income strategy in their convertibles trading.
U.S. investors report an average of $1.2 billion in convertible assets under management, compared to $1.3 billion on average reported by investors in Europe. In both cases, that is down modestly from 2002. 76% of the assets of U.S.-based investors are invested in U.S. convertibles, while just 47% of the assets of European investors are invested in European convertibles.
European convertible investors generally use somewhat greater leverage then their U.S. counterparts. U.S. hedge investors employ on average a 2.1 leverage ratio, down significantly from 3.1 in 2002. European hedge investors use a much higher leverage ratio of 3.5, though that is down significantly, too, from 4.6 a year ago.
“Concerns about credit quality risks have clearly contributed to the de-leveraging,” consultant Jay Bennett comments.
U.S. convertible investors have larger average allocations to below-investment-grade assets than their European counterparts and allocate more of their convertible assets to distressed/high-yield securities. Conversely, European convertible portfolios are dominated by investment-grade holdings, which make up 76% of their total convertible assets, versus 56% in the United States.
In both markets, investors have dramatically raised the proportion of assets protected by credit default swaps, though this proportion is twice as high for European convertibles (32%) than for U.S. convertibles (17%), again reflecting clear differences in the credit quality of these portfolios.
From February to April 2003, Greenwich Associates interviewed dedicated convertible fund managers and traders at 106 funds based in the U.S. (and investing in U.S. convertibles) and 67 global institutions investing in European convertibles.