Performance
The first nine months of 2025 have been a very good period for the U.S Convertible market. The steep market decline in equity and equity-linked convertible markets from mid-February through early April seems long forgotten. Year-to-date (as of 9/30/25) the ICE BofA U.S. Convertible Index is up 15.70%, slightly ahead of the S&P 500’s 14.81% advance and lagging the tech-heavy NASDAQ’s 17.96% gain (source: Bloomberg). Despite the presence of many small and mid-cap companies in the U.S. convertible market, the asset class has not been negatively impacted by the performance of the small cap Russell 2000 Index which is up 10.38% year-to-date (source: Bloomberg). The solid performance of convertible securities relative to the major equity indices stocks has been helped by several small to medium-sized convertible issuers tied to AI infrastructure, cryptocurrency, and aerospace, that have experienced sharp gains this year and do not have meaningful weightings in the equity indices.
With the recent runup in the market, the average convertible bond price reached 119 at the end of the third quarter compared to just above 100 at the start of the year (source: Bloomberg). With this higher price comes greater equity sensitivity, or delta, and less downside mitigation in the event that stocks retreat. We are mindful of this market shift and have transitioned out of several very high delta portfolio positions into more defensive ones.
Issuance
Through the end of the third quarter of 2025, new issuance totaled $81.9 billion (source: Bank of America data), well ahead of last year’s $52.5 billion of new issuance for the same period. September alone saw $16.3 billion of new issuance as companies continue to use the convertible market as a source of funds to refinance existing debt or to meet capex needs (source: Bank of America data). New issuance has come from a variety of sectors and market caps. Even with the recent drop-in interest rates, the convertible market remains a source of lower cost debt financing for companies seeking to raise capital. We purchased several new issue offerings as we believed that these companies have solid underlying businesses, strong prospects for growth, and reasonable valuations based on prospective free cash flow estimates. We expect the pace of new issuance going forward to be somewhat dependent on the direction of the equity markets. If stock prices remain elevated, company managements are likely to remain comfortable issuing a debt instrument linked to their common share price.
Positioning and Outlook
The convertible market’s tremendous performance, up 8.58% in the third quarter alone, has us a bit more cautious in our outlook for our equity-linked asset class (source: Bloomberg). In addition, the increased equity sensitivity of the average convertible bond makes the market a bit more vulnerable in the event of an equity selloff. We have reduced our exposure to several securities with elevated bond prices and a high degree of equity sensitivity and lack of downside protection. More importantly, we have not chased those segments of the markets such as cryptocurrency whose valuation is not supported by a sound underlying business and free cash flow. While we are cautious about the direction of equities, we maintain a measured and agnostic stance on the broad market’s direction, focusing instead on valuation discipline and issuer fundamentals. We are not incorporating any macro-economic view into our investment decisions. Our largest exposure is to the Information Technology sector which also has the largest representation in the U.S. convertible universe. We are relatively in-line with the benchmark’s 29% weighting for that sector. We remain overweight in the Healthcare sector and underweight Utilities and Financials. We continue to believe that our process, which emphasizes strong company fundamentals and reasonable valuation, will outperform over a complete market or economic cycle.
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