Deemed niche and complex by some, convertible bonds take the stage among institutional investors.
Convertibles are unique hybrid securities that take life in the form of either bond or stocks. Though issued as a bond, they can be converted into a predetermined amount of the company’s equity at certain times during its life, usually at the discretion of the bondholder.
Firms, such as Boston-based investment firm, Cutler Capital Management, specialize in these instruments, and note they provide “equity-like growth with less risk.” The firm has roughly 270 million assets under management.
While Cutler’s current investor base primarily consists of high-net worth individuals, the firm is eyeing opportunities to take the advantages of convertibles to institutions.
“Our heritage has always been with convertibles, but we’re attracting institutional clients to use investment grade, convertible bonds because firms such as endowments and foundations are looking for something better than a standard corporate bond portfolio,” said David Grenier, president of Cutler.
Persistently low interests rates are perpetuating pessimism amongst bond investors.
“The future is not as rosy as it once was for corporate bonds,” noted Grenier. “Convertibles are flexible and also protect investors from inflationary pressures. They’re the next logical step to tie to institutional portfolios.”
In recent times of market volatility, open architecture, or a “go-anywhere,” flexible type of asset allocation model has become favorable for institutions. For firms who hone expertise on flexible instruments, that could present opportunities.
Cutler recently hired Robert Butman, and Paul Bucci as managing directors and portfolio managers at the firm. Both have “over 20 years of experience working with convertibles and institutions,” according to Grenier. Butman and Bucci are both formerly of Second Moment Capital Management, an investment firm they co-founded in New Canaan, Connecticut
“We feel we don’t have to own the whole market; we can pick and choose,” Grenier said. “It’s through the convertible world that we bring value to client and that’s the primary driver behind adding Bob and Paul.”