Recent research by Nomura, which looks at the long-term performance of equity, debt and convertibles in Europe, Japan and Asia, shows that equity managers could have achieved superior risk-adjusted returns by ignoring equities altogether and investing solely in convertibles. Fixed-income and mixed-fund managers could also have improved their risk-adjusted performance by adding a significant weighting of convertibles, even though debt outperformed both asset classes over the period of the study.
The study looked at weekly data beginning in 1994, 1997 and 1998 in Europe, Asia and Japan respectively, the earliest dates for which useable data were available.
The study confirms that convertibles live up to their hybrid nature by providing upside exposure and downside protection. Convertibles behaved like equity when equity markets were strong, with low sensitivity to interest rate movements, and performed like debt when equity markets were bearish, with little sensitivity to equity movements but responding to changes in interest rates and credit like a pure debt instrument.
| Returns and risk in Europe and Asia | |||||||||
| Return | Risk | Sharpe ratio | Return | Risk | Sharpe ratio | Return | Risk | Sharpe ratio | |
| Debt | 6.90% | ||||||||