Convertible bond STRATEGIES

Convertibles

why invest in convertibles
Most convertibles issuers are small- and mid-cap companies. Convertibles offers the potential to participate in the upside potential of the underlying equity with the downside protection of a bond. Historically, this asymmetry provides one of the most attractive risk-adjusted total return opportunities for long-term investors in the public markets. In addition, convertibles’ lower duration offers an attractive investment alternative to traditional fixed income in a rising interest rate environment. 
our edge

Why Nicholas Convertibles

Focus: specialize in dynamically growing small- and mid-cap companies
Insights: invest in both equities and convertibles for a holistic view of company
Discipline: combine breadth of quantitative tools with traditional fundamental equity and credit analysis
Alignment: constrain capacity to add value and invest alongside clients
Experience: principals have been managing portfolios for over 30 years
LEAD PORTFOLIO MANAGER
John Wylie
resources
PORTFOLIO MANAGER
Catherine Nicholas
our approach

Investment Philosophy

We believe that dynamic change often creates a disconnect between a company’s future earnings power and its stock’s valuation. Growth catalysts are often not fully understood and expectations tend to be adjusted upwards gradually. We seek to exploit this inefficiency by investing in dynamic companies exhibiting signals of change that will lead to an acceleration in revenue and/or earnings growth in which our research confirms the company’s growth is sustainable and its stock is a timely investment.

Our convertibles portfolios combine fundamental equity research with traditional credit analysis to identify those issues with an attractive asymmetrical risk/reward profile, those convertible securities that participate in most of the upside and less of the downside performance of the underlying equity.

Portfolio Construction

Portfolios are actively managed to continually drive to the strongest investment ideas. Position sizes are based on the conviction in the investment thesis of each company relative to other portfolio holdings and risk exposures. Early warnings signs that suggest deterioration in company fundamentals or earnings strength lead to timely sell decisions.

Risk Management

Risk analysis is essential to minimize uncertainties and enhance potential long-term gains for client portfolios. To understand intended and unintended sources of risk, our investment team leverages quantitative tools with experience, judgment and deep knowledge of the holdings within a portfolio on a daily, weekly and monthly basis.

Typical Investment Policies

Number of Positions     50–75
Geography                       US convertible bonds
Capitalization                  Greater than $100M
Security Max                   5%
Issue Exposure Max      7%
Industry Max                   30%
Leverage                          0%*
Cash                                 Transactional, typically <5%
*We have clients who request us to apply leverage to their convertibles portfolios. Nicholas Convertibles Plus is a leveraged convertibles strategy that has a maximum leverage of 2.5x.

Driver of Expected Return

Bottom up, research-driven security selection that incorporates the coupon yield as well as the upside potential of each security’s embedded equity option. Industry and sector weights and factor exposures are a residual of the security-selection process.