...Equity Component Drives Returns, Reduces Convexity A shift towards an equity profile (higher delta) reflects tactical positioning as well as the increasing proportion of equity-like convertible bonds (CBs) relative to hybrids in the market. Fitch expects equities to be the main driver of performance in 2014, with volatility as a supplemental factor. Spreads and carry, which drove returns in 2012, should be negligible contributors. The evolution of funds from a "balanced" to "equity like" profile may reduce asymmetry of returns (ie, convexity). Steady Fund Flows In 2013-2014, convertible bond funds saw strong inflows from institutional investors, who were looking to add equity exposure to their fixed income portfolios. Flows went predominantly to global funds, which represent around 50% of the total universe. Relative to assets under management (AUM), flows were evenly split between regions. In total, CB's AUM has grown by about 40% since January 2012. Supply/Demand Imbalances Create Challenges...
