Covid-19 has likely been the most significant financial disaster since the Great Depression, adversely affecting companies in a wide array of sectors and wiping 10 years of capital gains for many retail investors. With uncertainty remaining for the foreseeable future as market recovery continues, now is an opportune time to highlight several developments in the convertible asset class, most notably as it relates to the downside protection convertibles have provided thus far in 2020 and the increased issuance from companies choosing convertibles as their preferred financing option.

Convertible bonds are, put simply, a powerful yet often overlooked asset class that provide structural alpha via “positive asymmetry.” They grant stable income through coupon payments and payoff at maturity, but if the underlying stock value of the issuing company crosses a certain valuation threshold, the embedded option of the bond then kicks in, converting to a predetermined amount of equity shares in the issuing company’s stock. This means convertible securities are typically positioned as a defensive way to access the equity markets, since instead of buying the equity outright and being exposed to unlimited downside losses, an investor is buying an equity option attached to a bond or preferred. This is particularly valuable during current times of volatility, where the VIX in March alone reached four of its five all-time intraday highs, creating a good litmus test for the asset class and its efficacy. While uncertainty related to medical, economic, political, financial market and other factors remains elevated, the convertible asset class has performed well thus far in 2020 relative to equity and some fixed income markets. It has in particular outperformed the S&P 500. As of 6/30, the ICE BofA All Convertibles Index gained 7.25% YTD, while the S&P 500 stood at -3.08% YTD on the same date.

Since many investors also consider convertibles as an enhanced fixed income strategy, it is worth noting that the broader convertible market has also outperformed asset classes like high yield, which was down nearly 5% during this same year-to-date period (ICE BofA U.S. High Yield Index). The convertible market also has roughly 25% exposure to investment grade companies and relative to other fixed income asset classes, convertibles have a much larger allocation to technology (where convertibles are typically the only debt in a company’s capital structure) and health-care companies. In addition, convertibles have experienced a much lower historical default rate than asset classes like bank loans and high yield.

While global issuance trends have been quite strong since a trough year in 2012, the continuing momentum seen in this pandemic has been even more encouraging. Calendar year 2019 was the strongest year of global issuance since 2009 and the strongest year of U.S. issuance since 2007. While 2019 was the strongest year of U.S. new issuance since 2007, year-to-date issuance over the first half of 2020 is 177% ahead of last year’s impressive pace. 2020 year-to-date issuance has been an astounding $96.4 billion. This is the largest amount of issuance in the first 6 months of any year on record. Companies like Carnival Corporation, Burlington Stores, and Booking Holdings issued convertibles to shore up liquidity to enable themselves to weather the near-term slowdown in their respective businesses. The issuance terms for these convertibles have also been very favorable for investors, particularly since these companies’ stock prices sold off substantially this year. For example, Carnival (CCL), an investment grade issuer, whose stock price had declined nearly 85% since January, issued a $2 billion convertible bond on April 1 with a 5.75% coupon, a three year maturity, and a 25% conversion premium, all of which combined to create a very attractive structure for investors.

Investing in convertible securities, which have on average less than a five-year maturity, where deep credit work has been performed to gain conviction that a company is creditworthy, can be a high value-added way to generate equity-like returns with only a portion of the risk. Convertibles have protected well in this period of elevated market volatility and issuance continues to hover around record levels with favorable terms for investors. During this opportune market environment, advisors are encouraged to consider accessing the asset class via closed-end or mutual funds, as active management is necessary to capitalize on current opportunities in the secondary market (convertibles are, for example, trading at their cheapest levels since 2011 and creating relative value opportunities). Given the more favorable performance of convertible bonds compared to high-yield over recent equity market selloff and heightened volatility, advisors should view as them as a core part of their clients’ portfolios going forward.

Tracy V. Maitland is president and CIO at Advent Capital Management. Daniel Partlow is managing director and chief risk officer at Advent Capital Management.