Equity prices are high and Treasury yields low in late 2021, but interest rates could move higher in coming years and pose a risk to both stocks and bonds. It’s time to think about new ways to diversify a portfolio away from traditional equity and fixed income allocations.
Convertibles have historically:
- Performed better than investment-grade fixed income in rising-rate environments
- Offered an opportunity to diversify equity allocations with a more attractive risk-adjusted return profile
Performance in rising-rate environments
Convertibles have historically performed better than traditional fixed income assets during periods of rising rates and have also cushioned equity market volatility. Convertibles are typically less sensitive to interest-rate risk than other types of bonds because, as hybrid instruments, they carry some exposure to the issuer’s underlying equity performance. Meanwhile, convertibles — most of which are bonds — pay current income and have shown the ability to dampen the effects of equity market drawdowns, barring any major shocks to equity markets.
In past periods when the 10-year U.S. Treasury yield increased by more than 150 basis points, convertibles (as measured by the ICE BofA U.S. Convertible Index) outperformed the broader investment-grade bond market (as measured by the Bloomberg U.S. Aggregate Bond Index). Convertibles delivered positive returns in most of the periods and outperformed the S&P 500 Index in several of them.
Performance during significant 10-year Treasury moves*
*Includes upward moves of 150 bps or greater. Source: Putnam, as of 9/30/21. Past performance is not a guarantee of future results. Returns are gross of fees in USD.
Diversify a portfolio for better risk-adjusted return potential
Aside from their results in rising-rate periods, convertibles can also be attractive as a long-term allocation. Their results are competitive with equities, but with lower volatility, for better risk-adjusted return potential.
Attractive risk-adjusted returns versus certain equity indexes
Source: Putnam, 20 years ending September, 2021. Convertibles represent the ICE BofA U.S. Convertible Index. Indexes are unmanaged and do not incur expenses. You cannot invest directly in an index. Past performance is not a guarantee of future results.
See the opportunity in convertibles
With the economy growing and inflation at higher levels, the Federal Reserve is discussing when to taper its bond purchases and begin to lift interest rates. This could push interest rates across the yield curve higher in coming years, and could pose a risk to stocks and bonds. Now may be an opportune time to consider an allocation to convertibles.
Learn more about Putnam Convertible Securities Fund. Putnam has over 45 years of experience managing convertible securities.
Disclosure: This material is provided for limited purposes. This material is a general communication being provided for informational and educational purposes only. It is not designed to be investment advice or a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. The opinions expressed in this material represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the material. Predictions, opinions, and other information contained in this material are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss. Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio. This material or any portion hereof may not be reprinted, sold, or redistributed in whole or in part without the express written consent of Putnam Investments. The information provided relates to Putnam Investments and its affiliates, which include The Putnam Advisory Company, LLC, Putnam Investment Management, LLC, Putnam Investments Limited® and Putnam Retail Management.
The ICE BofA (Intercontinental Exchange Bank of America) U.S. Convertible Index tracks the performance of publicly issued U.S. dollar-denominated convertible securities of U.S. companies. ICE Data Indices, LLC (ICE BofA), used with permission. ICE BofA permits use of the ICE BofA indices and related data on an “as is” basis; makes no warranties regarding same; does not guarantee the suitability, quality, accuracy, timeliness, and/or completeness of the ICE BofA indices or any data included in, related to, or derived therefrom; assumes no liability in connection with the use of the foregoing; and does not sponsor, endorse, or recommend Putnam Investments, or any of its products or services. The Bloomberg U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approve or endorse this material, or guarantee the accuracy or completeness of any information herein, or make any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. The S&P 500 Index is an unmanaged index of common stock performance. The Russell 1000 Index is an unmanaged index composed of approximately 1,000 of the largest companies in the Russell 3000 Index as measured by their market capitalization. The Russell 2000 Index is an unmanaged index composed of approximately 2,000 of the smallest companies in the Russell 3000 Index as measured by their market capitalization. The Russell 3000 Index is an unmanaged index of the 3,000 largest U.S. companies. The Russell 2000 Value Index is an unmanaged index of those companies in the small-cap Russell 2000 Index chosen for their value orientation. The Russell 2000 Growth Index is an unmanaged index of those companies in the small-cap Russell 2000 Index chosen for their growth orientation. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.