Following several years of strong issuance of convertible securities, many investors are digging in to learn more about the unique characteristics of an instrument that can offer both offense and defense. Convertible securities combine equity and debt features, allowing investors to participate in potential equity price appreciation while offering more limited downside risk provided by the debt feature. The Pier 88 Investment Team is constructive on the convertible bond asset class given a historically high Sharpe ratio, competitive yield and higher position in the capital structure relative to equities, risk-reward profile, and a plethora of new issuances allowing for a diversified portfolio to express thematic views.

As the asset class has a historically high Sharpe ratio, Pier 88 believes a fundamental “equity lens” approach provides a method to uncover compelling investment opportunities in the current macroeconomic environment. By focusing on the underlying equity element of this hybrid security and concentrating on “delta”, a main driver of returns, Pier 88 posits that convertible allocation can be a compelling way for investors to improve risk/return characteristics for investors. Essentially, this equity sensitive characteristic enables an active manager to add alpha via security selection. Further, the asset class may be a way to provide some downside protection for those equity investors who seek to be a little more conservative following a multi-year bull market run in equities.

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The companies identified do not represent all of the companies purchased, sold or recommended for portfolios advised by Pier 88 Investment Partners, LLC. The reader should not assume that investment in any company was or will be profitable. Additional information including a list of all companies is available upon request.