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TuChong Creative/Photos provided by Wu Qi/Table created

Securities Times reporter Wu Qi and intern Guo Yitong

This year, affected by market fluctuations, a large number of low-priced convertible bonds have fallen below their par value, and the risk of convertible bonds being delisted and defaulted has gradually emerged. As an important institutional investor in the convertible bond market, public funds are increasingly concerned about convertible bond investments.

From the performance point of view, the overall performance of relevant funds this year has been under pressure. Some funds, such as debt-biased mixed funds, flexible allocation funds and secondary bond funds have reduced their allocation of convertible bonds.

Convertible bonds are often seen as an important product for stable fund products to increase returns, but the CSI Convertible Bond Index has fallen for three consecutive years. Many fund products that have allocated convertible bonds have not only failed to increase returns, but their net value has been dragged down. Many public fund industry insiders said that the risk factors in the convertible bond market that were not taken seriously in the past have been exposed recently, and the investment logic has changed and needs to be re-examined.

More than 300 funds liquidated their convertible bond holdings

Domestic convertible bonds have always been considered by investors as a "safe" asset with a return-risk characteristic that is biased towards debt. They have been allocated in large quantities by many bond funds as important assets to enhance returns.

Publicly offered funds are important institutional investors in the domestic convertible bond market. According to the second quarterly report of funds, the scale of convertible bonds held by funds at the end of the second quarter of 2024 was 276.16 billion yuan, accounting for about 35% of the convertible bond market balance.

In terms of types, secondary bond funds, primary bond funds, and convertible bond funds are still the most important types of funds for convertible bond allocation, holding convertible bonds worth 106.806 billion yuan, 63.866 billion yuan, and 43.09 billion yuan respectively. In addition, debt-biased hybrid funds, flexible allocation funds, and passive index bond funds hold convertible bonds worth 28.135 billion yuan, 14.653 billion yuan, and 12.891 billion yuan respectively.

At the end of the first quarter of this year, the scale of convertible bonds held by public funds once shrank by 41 billion yuan, falling below 300 billion yuan. The main reason behind this is the sluggish convertible bond market. As of July 28, the CSI Convertible Bond Index fell 3.45% this year, and has been falling for three consecutive years.

Overall, the scale of convertible bonds held by various funds in the second quarter changed significantly. In terms of reduction, secondary bond funds reduced their holdings of convertible bonds by 9.637 billion yuan, the largest reduction, while debt-biased hybrid funds and flexible allocation funds reduced their holdings by 4.042 billion yuan and 2.113 billion yuan respectively. In terms of increase, convertible bond funds increased their holdings by 8.336 billion yuan, primary bond funds increased their holdings by 6.028 billion yuan, and passive index bond funds increased their holdings by 5.208 billion yuan.

It is not difficult to find that debt-biased mixed funds, flexible allocation funds and secondary bond funds, whose net value fluctuations are relatively large, have all significantly reduced their holdings of convertible bonds.

From the perspective of the change in the number of fund products, the number of funds holding convertible bonds at the end of the second quarter was 1,953, a decrease of 185 from 2,138 at the end of the first quarter. In addition, more than 300 funds including Caitong Asset Management Ruixiang 12 Months, Hongde Yutai, Huaxia Ruipan Taili, Tianhong Yongli Youjia, etc. chose to liquidate their convertible bond holdings in the second quarter.

In the second quarter of this year, the scale of bond funds increased significantly, with the scale of primary bond funds and secondary bond funds increasing by 120.36 billion yuan and 63 billion yuan respectively. In theory, convertible bonds, as underlying assets, will also increase in the same proportion, but the fact is that the market value of convertible bonds held by secondary bond funds has shrunk significantly.

From the above, it can be seen that public funds' concerns about convertible bond investments are rising.

Credit and delisting risk exposure

The convertible bond market has recently encountered a round of fierce credit shocks, and investor sentiment has become depressed. As of July 28, there are still 115 convertible bond targets in the convertible bond market that have fallen below par. The performance of funds with heavy positions in convertible bonds is under pressure as a whole. Among convertible bond funds, only a small number of funds such as ICBC Convertible Bond, Minsheng Jiayin Convertible Bond Selection, Baoying Rongyuan Convertible Bond, and Haitong Shanghai Stock Exchange Investment Grade Convertible Bond ETF have an annual return of more than 1%, while Oriental Convertible Bond and Huafu Convertible Bond have a year-to-date decline of more than 10%.

The convertible bond ETF fund manager analyzed in the second quarter report that after the release of the new "Nine National Regulations", the market valuation was obviously differentiated, and the premium rate of large-cap weighted bonds increased, while low-priced and weak-qualified products were abandoned. At the end of the second quarter, the equity market weakened again, coupled with the frequent rating adjustments and the increase in the number of underlying stocks falling below par, low-priced convertible bonds showed credit and delisting risks.

The convertible bond index followed the decline of stocks, but the differentiation was extremely serious. Similar to the stock market, large-cap convertible bonds performed better than small-cap convertible bonds, convertible bonds with high dividends as the underlying stocks performed stronger, and high-grade convertible bonds performed stronger than low-grade convertible bonds. Deng Dong, fund manager of Baoying Fund, pointed out that since June, due to market concerns about the credit risk of convertible bonds and the downgrade of credit ratings of some low-quality, low-priced small-cap convertible bonds, there has been a significant sell-off in the market. The market is worried about the delisting and credit risks of individual convertible bonds, and concentrated on selling convertible bonds with slight flaws, leading to a substantial adjustment of low-priced convertible bonds. The Wind Convertible Bond Low Price Index has widened its decline recently, and the index point has fallen back to September 2021.

According to the analysis of the manager of E Fund Double Bond Enhanced Bond Fund, the pure bond premium rate of convertible bonds has been at an extremely low percentile in the past six years, and the credit spread of convertible bonds relative to pure bonds is at a historical high. From a rational pricing perspective, the impact of stock shocks on convertible bond retracements is greatly reduced. However, current market participants have entered an extremely pessimistic trading stage for convertible bond credit spread pricing, and a large number of impulsive stop-loss transactions and herd-following effects have appeared in the market. The widespread and consistent concerns about credit risk in the convertible bond market have eliminated all optimistic factors in convertible bond prices and overpriced the pessimistic path of the asset's future.

Some fund managers also believe that some small and medium-sized convertible bonds with poor qualifications and new energy convertible bonds represented by photovoltaics have experienced large price fluctuations, exacerbating the sluggish convertible bond market.

Convertible bond investment logic changes

Many institutional investors frequently point out the risk factors in the convertible bond market and believe that the logic of convertible bond investment has changed significantly.

"Convertible bonds have experienced multiple rounds of credit crises in history, which has led to changes in pricing logic and bond selection frameworks." Huatai Securities analyzed that 2023 is the "first year" for the substantive credit risk of convertible bonds, and the number of bonds withdrawn in abnormal ways has gradually increased. In 2024, the dual risks of delisting and default are superimposed, and the underlying logic of the convertible bond market may be completely changed.

In terms of risk, many institutions have recently been wary of the further development of credit stratification of weak-qualified products. "Despite a certain degree of decline, convertible bonds are still not cost-effective, and debt products are more subject to credit risks and other tests, and uncertainty has increased significantly." Minsheng Jiayin Convertible Bond Preferred Fund Manager Guan Jian said frankly that the convertible bond market lacks a clear investment theme, and compared with the underlying stocks, there are more signs of speculation, and the difficulty of selecting bonds is still relatively large.

Huang Shiyuan, fund manager of ICBC Convertible Bond Fund, which has the best performance this year, said in the fund's second quarter report that convertible bonds are obviously overvalued, and his management portfolio maintains a relatively overweight position in stocks and a relatively underweight position in convertible bonds. He analyzed that the volume of stable growth convertible bonds has obviously decreased, and debt-biased convertible bonds have not fully priced some risks, and other types of convertible bonds do not have obvious advantages over the underlying stocks. Huang Shiyuan believes that in the future, the portfolio will continue to explore stable growth convertible bonds, and will also pay more attention to the downside risk of convertible bonds.

Compared with credit bonds, convertible bonds are at a stage with a higher cost-effectiveness in history. However, Bosera Fund also believes that the absolute level of the conversion premium rate is still high, which is still the biggest limit to upward elasticity. The holding structure should still be based on defense, and medium-to-high-rated and solid varieties should be selected for allocation. The valuation of these varieties is expected to remain at a satisfactory level under the asset shortage pattern of the bond market. Oversold varieties should be carefully screened for individual bond credit and underlying stock investment value, and appropriate reverse purchases should be made at appropriate prices.

Editor-in-chief: Wang Jiming Editor: Wang Yunpeng Art editor: Peng Chunxia

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