Best of Both Worlds: Convertible Bonds

Convertible Bonds: Best of Both Worlds
Contents
Introduction to convertible bonds
Do we have a real stand alone asset class?
Historical performance
What are the risk / return characteristics? Measuring convexity
Is strategic allocation possible?
Is sustained allocation possible?
Outlook for the convertible bonds market
What investment process to use?
EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS
Introduction to Convertible Bonds
What is a convertible bond
A convertible bond is a bond which is convertible into the equity of the issuing company. In
case the bond is convertible into the equity of another company it is called an
exchangeable bond. The investor can convert the bond at anytime before the maturity and
it is a choice for the investor, not an obligation.
As such, convertible bonds have characteristics of fixed income instruments (a fixed

maturity, an annual coupon rate, a redemption value) and equity instruments (via its
possibility to exchange it for shares)
Several drivers of return (and risk)
Equity
Implied Volatility
Credit
Interest Rates
Price behaviour of convertible bonds

Convertible bonds are a convex asset class
Due to the optional structure of convertible bonds, their returns distribution is
asymmetric. This feature is responsible for the convexity of this asset class:
Do we have a real stand alone asset class?
Illustration of the convertible bond convexity: historical analyses

Convexity increases in line with the investment horizon for convertibles, from 4 years
onwards convertible bonds deliver a positive performance on average when equities
are moving downwards
Convertible bonds* participation to upside and downside equity* movements over various investment
horizons: average annualized performance given by monthly returns over the last 10 years
80%
60%
40%
20%
0%
-20%
-40%
Average upside participation

Average downside participation
-60%
1 year
2 years
3 years
*Convertibles: UBS Global Focus EUR Hedged

Equities: MSCI World AC Local Currency
4 years
5 years
Source: EdRAM, data from 31/12/1993 to 31/12/2010

8
Illustration of the convertible bond convexity: historical analyses

Average annualized returns of convertible bonds and equities on rolling periods since
1993*
1 year
2 years
3 years
4 years
5 years
Annualized Volatility
Convertibles
Stocks
12%
19%
12%
21%
12%
20%
12%
18%
13%
16%
Annualized Returns:
Bear Stock Market
**
Convertibles
Stocks
-8%
-18%
-3%
-12%
-1%
-9%
1%
-5%
2%
-3%
Annualized Returns:
Bull Stock Market
**
Convertibles
Stocks
13%
16%
11%
14%
10%
13%
9%
12%
8%
9%
**
*Data from inception date of UBS Global Focus EUR Hedged
**Convertibles: UBS Global Focus EUR Hedged

Equities: MSCI World Total Return Local Currency
Convertibles have a very interesting risk / return profile

Convertible bonds have a strong correlation to equities, and a very weak correlation
to bonds
Correlation matrix, daily retruns 1994-2010
Convertibles
Bonds
Cash
Convertibles
100.00%
Bonds
-19.88%
100.00%
Cash
0.68%
0.29%
100.00%
Equities
85.34%
-22.94%
1.99%
Equities
100.00%
Convertibles : UBS Global Focus EUR Hedged / Obligations : JPM Global Govt Bonds Local Currency / Cash : JPM US Cash 1M / Actions : MSCI
World GR Local Currency
Source : EdRAM 30/07/10

10
Convertibles have a very interesting risk / return profile
A very low correlation to bonds

A risk / return profile which is superior to the one of equities, stable over different
investment horizons
The performance is linked to the convexity of the instrument which benefits from rising
equity markets whilst benefiting from fixed income characteristics : a fixed coupon and a
redemtion date
11
Performance Global Equities Global CBs Govt Bonds

Cash: 1993* to 2010
Convertibles
Cash **
280
**
Bonds **
Equities **
260
240
220
200
180
160
140
120
100
01-10
01-09
01-08
01-07
01-06
01-05
01-04
01-03
01-02
01-01
01-00
01-99
01-98
01-97
01-96
01-95
01-94
80
*Data from inception date of UBS Global Focus USD index.

**Convertibles: UBS Global Focus USD Bonds: JPM Global Govt Bonds in USD. Cash: JPM US Cash 1M Equities: MSCI World USD
12
A world of opportunities: size of the CB market
Number of Issues
United States
683
Asia
226
Japan
124
Europe
217
Middle East
6
Other
29
Total
1285
Total Size ($m)

263 530
46 038
42 827
100 407
3 563
11 179
Average Size ($m)

386
204
345
463
594
385
Weight
56%
10%
9%
21%
1%
2%
467 544
364
100%
Source:Deutsche Bank, EdRAM 31/12/10

13
A strategic allocation is possible
For an institutional investor who manages USD 100 billion, a 5% allocation to convertible
bonds represents
About 1% of the universe
An investment in all geographical zones
An acces to varied profiles, diversified over all sectors
14
A strategic allocation is possible
According to the paper Convertible Bonds as an Asset Class : 1957-1992
Convertible bonds are a very effective diversification tool for low risk portfolios composed mainly of
bonds and real estate
In an optimisation without constraints, the minimum variance portfolio contains 5% of convertibles
In portfolios that are optimised with constraints on the maximum allocation to equities (which is the
case for most institutional investors), we observe that the minimum variance portfolio will allocate
out of equities into convertibles
15
An enduring asset class
Convertible bonds have a long history
The first convertible was issued by an American rail tycoon in 1880
In Europe France has a legal framework since 1953
The asset class adapts itself to the needs of the modern investor: ringfence clauses, dividend
protection clauses and takeover protection clauses are common today
16
Issuers per geographic zone include
United States: Microsoft, Intel, EMC, Gilead, Amgen, Medtronic, Ford, Qwest, Goldcorp, Newmont
Mining
Europe: KfW/Deutsche Telekom, KfW/Deutsche Post, Artemis/PPR, Alcatel, Publicis, Shire,

Eurazeo/Danone, MNV/Gedeon Richter
Azia: Sinopec, Plus Expressways, Telekom Malaysia, SK Telecom, Capitaland, Olam, Hynix
Japan: Suzuki Motor, Toshiba, Hitachi, Sharp, Nikon, Nidec, Softbank, Orix
Others: BES/Bradesco, AngloGold, Cemex, Vedanta
17
Advantages for issuers
Debt
Advantages
Cheaper than equity
Attractive from a fiscal point of view
Equity
Advantages
Flexible you are not obliged to pay a
dividend
No refinancing risk
Disadvantages
Disadvantages
Creates leverage
More expensive
Interests need to be paid
Dilutive
Refinancing risk
Convertible bonds combine the advantages of debt and equity

18
Various types of issuers will animate the primary market in various stages of the business
cycle
Diversification and optimisation of company finances
Delayed equity issuance for growth companies
Opportunistic issuance (share buybacks) for investment grade companies
Monetisation of participation when issuing exchangeables
Refinancing of last recourse
The bonds will adapt various profiles over there lifecycle, bonds that are less interesting at
issue can become so during there life on the secondary market, not everything is worth
buying at issuance
19
An stand alone asset class
Convertible bonds are an asset class :
A very a-typical risk return profile, in combination with a strong correlation to equity markets
A specialised investor base
A universe big enough to have a significant allocation for most investors
A universe that renews itself over time
Various articles have been published on the subject, in particular Convertible Bonds as
an Asset Class : 1957-1992 by Scott L. Lummer et Mark W. Riepe published in the
Journal of Fixed Income in 1993
20
Outlook for the convertible bond market
A very active primary market since March 2009

More than USD100bn issued in 2010
New issue 1998-2010
An average year for the primary

market that allows the universe to
grow
220
200
180
Numerous new issues in the US with a

small size on average
160
US$bn
140
120
Emerging markets gathers around

30% of the new issues
100
80
60
40
First appearance of Jumbo deals in

Asia
20
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US
Europe
Asia
Japan
Other
Source : UBS 31/12/10

22
The primary market offers some attractive features
Average maturity per quarter 2002-2010

20 yrs
16 yrs
12 yrs
Average:
10.3 yrs
Q4 2010
10.2 yrs
8 yrs
20
10
Q
3
20
10
Q
1
20
09
Q
3
20
09
Q
1
20
08
Q
3
20
08
Q
1
20
07
Q
3
20
07
Q
1
20
06
Q
3
20
06
Q
1
20
05
Q
3
20
05
Q
1
20
04
Q
3
20
04
Q
1
20
03
Q
3
20
03
Q
1
20
02
Q
3
Q
1
20
02
4 yrs
Source: EdRAM, Deutsche Bank as of 31/12/2010

23
Average Coupon per Quarter 2002-2010

6.0%
5.5%
5.0%
4.5%
4.0%
Average:
3,7%
3.5%
Q4 2010:
3,4%
3.0%
2.5%
2.0%
1.5%
20
10
Q
3
20
10
Q
1
20
09
Q
3
20
09
Q
1
20
08
Q
3
20
08
Q
1
20
07
Q
3
20
07
Q
1
20
06
Q
3
20
06
Q
1
20
05
Q
3
20
05
Q
1
20
04
Q
3
20
04
Q
1
20
03
Q
3
20
03
Q
1
20
02
Q
3
Q
1
20
02
1.0%
Source : EdRAM, Deutsche Bank as of 31/12/2010

24
Average Premium by Quarter 2002-2010

50%
45%
40%
35%
30%
Average:
28,3%
Q4 2010:
27,0%
25%
20
10
Q
3
20
10
Q
1
20
09
Q
3
20
09
Q
1
20
08
Q
3
20
08
Q
1
20
07
Q
3
20
07
Q
1
20
06
Q
3
20
06
Q
1
20
05
Q
3
20
05
Q
1
20
04
Q
3
20
04
Q
1
20
03
Q
3
20
03
Q
1
20
02
Q
3
Q
1
20
02
20%
Source : EdRAM, Deutsche Bank as of 31/12/10

25
Convertible Bonds are still attractively valued

Convertible bonds are still undervalued in terms of implied volatility compared to the
corresponding options and underlying equities
Chart comparing the volatility on convertible bonds, on options and on
their underlying equities for the European universe
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
janv-04
janv-05
janv-06
janv-07
Avg Imp Vol
janv-08
Eq Vol 90 day
janv-09
janv-10
6m ATM
Source: BofA Merrill Lynch as of 31/12/10

26
Several drivers of return (and risk)

What to expect?
Equity
Implied Volatility
Credit
Interest Rates
27
What investment process to use?
Saint-Honor Global Convertibles:

A proven expertise, a world of opportunities
A global convertible bond fund, targeting a consistent performance over the
business cycle
Limited credit risk:
Minimum 50% of the CBs in the portfolio are investment grade
Focus on balanced convertibles:

Individual holdings equity sensitivity <80%
Fund equity sensitivity within range of 20 to 60%
Moderate Emerging markets risk

Maximum 40% of exposure to the Emerging markets
Limited currency risk:

At least 80% of the portfolio is hedged
Active management, independent from benchmarks
29
Saint-Honor Global Convertibles:

A proven expertise, a world of opportunities
A global investment universe 5 times bigger than the European universe
A well diversified global universe on a sector level
An actively managed fund, reflecting Edmond de Rothschild Asset Managements

strongest global investment convictions, implemented through a CB portfolio
A vehicle to play the global recovery, with a bond floor
30
A dual investment process for a hybrid asset class
Bottom-up approach
Top-down approach
Investment Universe
Macro Input
Short-list of convertibles
(delta, conv, prem)
Short-list taking into account

Equity portfolio managers
views
Stock market
Portfolio
Construction
Credit
Environment
Volatility
Interest Rates
Target Positioning
Shared offices encourage strong communication between all fund managers

at Edmond de Rothschild Asset Management
31
Performance Saint-Honor Global Convertibles

AUM
AUM
As
of
31/01/2011:
As of 31/01/2011:
415.6
415.6MM
+21.6%
Source: Europerformance and Edmond de Rothschild Asset Management. The figures mentioned deal with past years. Past performance is not a
reliable indicator of future performance. Performance is calculated on the basis of cumulated returns. Data from 31/07/2009 to 31/01/2011.
32
Saint-Honor Global Convertibles :

Performance as of 31/01/2011
Priod
YTD
1 year
Since 31/07/2009
Saint-Honor Global Convertibles

Performance
1,61%
10,89%
21,60%
Performance
Volatility
3,76%
7,18%
7,02%
Benchmark
Performance
1,14%
11,51%
19,67%
Volatility
4,16%
6,46%
6,50%
MSCI World Local Currency

Volatilit
Performance
1,40%
16,95%
26,35%
Volatility
7,64%
13,59%
14,01%
Source: Edmond de Rothschild Asset Management. Fund created on 17/07/2009. The figures mentioned deal with past years. Past performance is not a reliable indicator of future performance.
Performance is calculated on the basis of cumulated returns. Performance since inception data is reserved for professional clients only as identified by the AMF regulation. Non-professional
investors should not take this information into account.
33
Performance Saint-Honor Global Convertibles
Saint-Honor Global Convertibles benefited from the following investment themes in 2010:
Gold miners: Newmont Mining, AngloGold, Hochschild Mining
Agricultural commodities: Olam, Marine Harvest
Pharmaceuticals: Gilead Sciences, Onyx Pharmaceuticals
Technologies: EMC, Priceline.com
M&A stories: Sybase, Saks
34
Conclusion
The new cycle that has begun in 2009 should carry on during the next years.
As of today our portfolios are balanced, with equity sensitivity near 35% and yield to
maturity/put around 2.5%. However we have a more defensive sector bias than in 2009
and 2010.
Convertible bonds have a low interest rate sensitivity and represent an good alternative
to rates/credit in a low interest rate environment.
An active management of the funds is crucial to avoid a bias on sectors/areas overweight

in the indices.
We prefer Saint-Honor Global Convertibles and Saint-Honor Emerging Convertibles in

order to benefit from a better geographical diversification and/or benefit from an exposure
to Emerging markets
35
Convertible Bonds
The Team
The Investment Team

Kris Deblander
Deputy Director - Head of Convertible Bonds
Kris Deblander joined Edmond de Rothschild Asset Management in November 2008 as Head of Convertible Bonds
management.
Kris Deblander is a graduate of the Solvay Business School.
In 1997, after spending a year in research at Brussels University, he joined Fortis Investment Management in Brussels to be in
charge of structured product development and management. In 2002, he joined Fortis Investment Management Paris as co-manager
of European Convertible Bonds. For over 6 years he took an active part in developing Convertible Bond funds both geographically
Europe/Asia/World and in terms of investment techniques (Convertible arbitrage funds). In 2006, he was appointed Deputy CIO
Convertible Bonds. He was in charge of convertible arbitrage funds and jointly responsible for fifteen portfolios including mandates for
French and international institutional clients.
The Convertible bond team reports to Philippe Uzan, Director of Research & Global Allocation.
Laurent Le Grin
Fund Manager - Convertible Bonds
Laurent Le Grin joined Edmond de Rothschild Asset Management in November 2010 as portfolio manager in the
Convertible Bonds team.
Laurent Le Grin holds a Masters in Banking and Finance and a post graduate degree in economics from the University of Paris II.
He first worked as an equity analyst at the Banque Gnrale du Luxembourg where he covered banks and technology in Southern
Europe. In September 2002, he joined Fortis in Paris to manage European equity funds and micro-caps. In March 2006, he joined the
convertible bond team at Fortis Investments/BNP Paribas Asset Management as a senior manager of European convertible bonds.
37
The Investment Team

Cristina JARRIN
Fund Manager Convertible Bonds
Cristina Jarrin joined Edmond de Rothschild Asset Management in December 2010 as portfolio manager in the Convertible
Bonds team.
Cristina Jarrin holds an MBA from HEC Paris, a Masters in Finance from the University of CEMA in Argentina as well as a BA in
Finance from the University of San Francisco.
She joined Citigroup in 1998 where she first worked as a risk analyst in Quito, Ecuador and subsequently as a financial analyst in
Buenos Aires, Argentina. In 2004, as part of her MBA programme at HEC, she worked at Calyon Investment Banking (Paris) where
she was in charge of a private fund placement. In 2005, she moved to BNP Paribas Investment Partners - Fortis Investments, first as
a convertible bond specialist and then as the manager of a US convertible bond fund with EUR 800m under management.
Nicolas Schrameck
Fund Manager Convertible Bonds
Nicolas Schrameck joined Edmond de Rothschild Asset Management in April 2009 as an analyst in the Convertible Bonds
team.
Nicolas Schrameck graduated from the EDHEC Business School.
In the past, he worked for J.P. Morgan Asset Management as a convertible bonds management assistant.
38
Disclaimer (1/2)
This material is issued by Edmond de Rothschild Asset Management an investment manager registered with the Autorit des Marches Financiers in France,
incorporated as a socit par actions simplifie registered under SIREN n332 652 536 at the Paris RCS, whose head office is at 47, rue du Faubourg SaintHonor, 75008 Paris.
The data, comments and analyses in this material reflect exclusively the opinion of Edmond de Rothschild Asset Management with respect to the markets and
their trends, regulation and tax issues, on the basis of its own expertise, economic analyses and information currently known to it. However, they shall not
under any circumstances be construed as comprising any sort of recommendation, undertaking or guarantee whatsoever on the part of Edmond de
Rothschild Asset Management.
Therefore, this material shall not be considered as an offer to invest or to sell nor a solicitation to buy or subscribe any of the securities described herein and
should not be regarded as an investment advice.
In no event shall Edmond de Rothschild Asset Management assume responsibility for any decision to invest, to disinvest or to maintain a position on the basis
of these comments or analyses.
The information contained in this material is provided without knowledge of investors situation, including financial situation, risk profile and investment goals.
Such investment decisions shall be made by the investor based in his/her own independent analysis. It is the responsibility of each and every investor to
obtain the various regulatory prospectuses for each fund or financial product prior to making any investment and to analyse the risk incurred and establish his
or her own opinion, independent of Edmond de Rothschild Asset Management, and where necessary, to take specialist advice regarding such questions, and
especially in order to determine the relevance of such investment to his or her own financial situation. Past performance and volatility is no guide to the future.
The value of investments may fall and rise and performance is not constant over time. Given the economic and market risks, there can be no assurance that
the fund will achieve its investment objectives. The performances are shown net of management fees, but do not include subscription fees or taxes. Past
performance and rankings are not a guarantee of future results. Yields may be affected by, among others, strategies or investment objectives of funds, and
the important factors of the economy and markets. Investors may lose the amount originally invested.
39
Disclaimer (2/2)
Details of the principal risks in the funds can be found in the pertinent Prospectus. The summary Prospectuses approved by the French market authority and
all legal documentation regarding the funds are available upon request and may be found on our website at www.edram.fr (http://www.edram.fr).
The funds mentioned in this document have not been necessarily approved, registered or authorized for public or private offering or distribution to investors in
other countries. The funds are not being offered in any particular jurisdiction but in those were they have been registered, authorized or approved for public or
private offering. The funds should not be marketed to or subscribed by investors except in countries where they are registered, authorized or approved for
public or private offering.
In countries where these funds are not registered, they can be purchased by institutional investors only if local regulations authorize these institutional
investors to subscribe to a non registered fund.
Edmond de Rothschild Asset Management therefore recommends that all interested parties ensure that they are legally authorized to subscribe to the
products and/or services before any investment is made.
This document is distributed on a confidential basis. This document may not be reproduced in any form or transmitted to any person other than the person to
whom it is addressed.
40

Best of Both Worlds: Convertible Bonds

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Convertible Bonds: Best of Both Worlds

Introduction to convertible bonds

Do we have a real stand alone asset class?

What are the risk / return characteristics? Measuring convexity

Is strategic allocation possible?

Is sustained allocation possible?

Outlook for the convertible bonds market

What investment process to use?

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

Introduction to Convertible Bonds

What is a convertible bond

As such, convertible bonds have characteristics of fixed income instruments (a fixed

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

Several drivers of return (and risk)

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

Price behaviour of convertible bonds

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

Do we have a real stand alone asset class?

Illustration of the convertible bond convexity: historical analyses

Average upside participation

*Convertibles: UBS Global Focus EUR Hedged

Source: EdRAM, data from 31/12/1993 to 31/12/2010

Illustration of the convertible bond convexity: historical analyses

*Data from inception date of UBS Global Focus EUR Hedged

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

**Convertibles: UBS Global Focus EUR Hedged

Convertibles have a very interesting risk / return profile

Correlation matrix, daily retruns 1994-2010

Source : EdRAM 30/07/10

Convertibles have a very interesting risk / return profile

A very low correlation to bonds

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

Performance Global Equities Global CBs Govt Bonds

*Data from inception date of UBS Global Focus USD index.

A world of opportunities: size of the CB market

Total Size ($m)

Average Size ($m)

Source:Deutsche Bank, EdRAM 31/12/10

A strategic allocation is possible

About 1% of the universe

An investment in all geographical zones

An acces to varied profiles, diversified over all sectors

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

A strategic allocation is possible

According to the paper Convertible Bonds as an Asset Class : 1957-1992

In an optimisation without constraints, the minimum variance portfolio contains 5% of convertibles

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

An enduring asset class

Convertible bonds have a long history

The first convertible was issued by an American rail tycoon in 1880

In Europe France has a legal framework since 1953

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

An enduring asset class

Issuers per geographic zone include

Europe: KfW/Deutsche Telekom, KfW/Deutsche Post, Artemis/PPR, Alcatel, Publicis, Shire,

Others: BES/Bradesco, AngloGold, Cemex, Vedanta

EDMOND DE ROTHSCHILD ASSET MANAGEMENT | CONVERTIBLE BONDS

An enduring asset class

Advantages for issuers

Interests need to be paid

Convertible bonds combine the advantages of debt and equity

An enduring asset class

Diversification and optimisation of company finances