Our outlook for convertible bonds for the second half of 2020 remains constructive.
Convertibles provide exposure to fast growing, higher beta companies in the Technology and Healthcare space (currently over 50%+ of the universe), with meaningfully truncated downside and reduced risk. Convertibles provide risk-controlled exposure to some important secular trends and disruptive companies serving large addressable markets, benefiting from accelerating economic trends, and have the potential for long-lasting high growth, even hyper-growth in some cases. Some of the major structural growth themes for 2020 and beyond include digitization of the economy and cloud computing; genomics, personalized medicine, gene therapy, telehealth, and biotech M&A; and 5G build out, data center reacceleration, artificial intelligence, and automated mobility.
Were there to be a double dip or a W shaped recovery, convertibles are likely to do a good job of protecting on the downside, just as they did in prior episodes of recessions. Convertibles are one of the few asset classes that contractually provide downside protection, as the principal and coupon are protected and are senior to equity claims.