Reverse convertibles represent a kind of all-rounder
finanzen.net: What reasons and causes do you see for the great popularity of reverse convertibles among investors?
Heiko Geiger: A key factor in the ongoing success of this asset class is certainly the low level of interest rates that investors have been confronted with for some time now. Classic reverse convertibles, on the other hand, regularly offer interest income in the high single-digit and sometimes double-digit range. Depending on the specific design, values of over 10% are often even possible. This means that the interest is usually higher than the dividend yield of the share to which the convertible bonds relate. Of course, investors should consider when making their investment decision that the higher the interest rate, the higher the risk of the investment.
finanzen.net: What are the pros and cons of reverse convertibles? Or would you rather recommend the classic share?
Heiko Geiger: Reverse convertibles can be suitable for different market situations, while investors only benefit from their direct equity investments when prices and dividends rise. An interesting return can be achieved at the end of the term even if the price of the underlying is stable. Correspondingly, in the case of reverse convertibles, even neutral expectations regarding the future performance of the underlying asset could be sufficient to enter into corresponding investments. Depending on the features, a positive return is still possible even if the price of the underlying asset falls moderately. If the underlying share loses a little more in value over the entire term, the holders of reverse convertibles also suffer losses. If share prices rise slightly, reverse convertibles can achieve a yield advantage over a direct investment. On the other hand, if the price of the underlying asset rises sharply, it performs better. Investors who expect high gains will therefore opt for a direct investment. In contrast to the reverse convertible, you do not have to forego any dividend payments.
finanzen.net: What type of investor do you recommend reverse convertibles as an investment?
Heiko Geiger: Reverse Convertibles can be of particular interest to investors who are looking for an investment with a reasonable investment horizon that pays interest above the general market interest rate. The buyer should expect a stable performance for the selected underlying during the planned investment period, i.e. prices moving sideways. Based on this expectation, buyers of reverse convertibles must be prepared to forgo any dividends and to make the repayment of the nominal amount dependent on the performance of the underlying.
finanzen.net: What are the most important factors when choosing the right reverse convertible?
Heiko Geiger: In principle, an investment in derivative securities, which also include reverse convertibles, should never be made if the essential features of the product or the main risks associated with it are not understood. With regard to reverse convertibles, the investor should also have a clear opinion of the expected price development of the underlying asset before investing, and the risks associated with the product should correspond to the buyer’s personal risk appetite. The risk of loss with reverse convertibles is not limited, i.e. a total loss of the capital invested is possible, for example if the underlying is worthless at the end of the term. In addition to the market risk, the issuer risk must also be taken into account.
finanzen.net: For example, how does Vontobel help with the product search?
Heiko Geiger: The Vontobel product range currently includes around 20,000 different reverse convertibles. This gives investors the opportunity to find the right product for almost every opportunity-risk profile. To make it easier for you to search and select reverse convertibles and their variants, visit our website www.certificates.vontobel.com, in the “Attractive Reverse Convertibles” section, an hourly updated compilation of interesting reverse convertibles that appear particularly interesting in the current market environment. Other interesting product ideas can be found in the weekly “Aktienbonden Investor” newsletter, which can be subscribed to free of charge via the homepage.
finanzen.net: What are the different forms of reverse convertibles and how do they differ?
Heiko Geiger: In addition to a large selection of classic reverse convertibles, Vontobel also offers barrier reverse convertibles, which have an additional price threshold (barrier) below the base price compared to the classic starting version. If the price of the underlying asset does not touch or fall below the barrier at any time during the term, 100% of the nominal amount is repaid. Barrier Pro reverse convertibles also have a barrier. However, this is not monitored continuously, but only at the end of the product’s term. The product range is rounded off by multi-structures with several underlyings and their variants with a barrier.
finanzen.net: What are currently the top reverse convertibles?
Heiko Geiger: The reverse convertible market is currently dominated by large DAX stocks, as investors prefer the well-known and therefore solid underlyings, especially in turbulent times. However, it is becoming apparent that investors are increasingly turning to second-tier titles such as companies from the MDAX and TecDAX. Due to the increasing volatility, especially in times of the pandemic, investors can secure high coupons.
finanzen.net: Are reverse convertibles also suitable for long-term asset accumulation?
Heiko Geiger: The yield potential generally increases with the term of a reverse convertible. Nevertheless, investors should bear in mind that the success of reverse convertibles depends on the price development of the underlying asset. The longer the term of the product, the more uncertain its development. Convertible bonds are in demand because they usually have a term of 12-15 months. Investors do not have to actively manage their portfolio. Anyone who has set themselves a target return and is willing to take a certain risk will find reverse convertibles and barrier reverse convertibles to be an excellent alternative, which enable investors to build up an individual portfolio.
finanzen.net: How do you rate the risk versus the return?
Heiko Geiger: Reverse convertibles are among the so-called yield enhancement products. This category of financial products involves derivative securities, where the returns are usually limited to a maximum amount. On the other hand, as already mentioned, they also generate positive returns in sideways and even moderately falling market phases, and even if the price of the underlying asset rises slightly, they generally generate higher returns than the latter. At the same time, a potential loss in the case of reverse convertibles can be cushioned somewhat by the interest payment, but will generally not be able to fully compensate for this.
finanzen.net: What advice would you give to any prospective investor in reverse convertibles?
Heiko Geiger: Every investor should be aware of the associated risks when purchasing derivative products, including reverse convertibles, and use these to select the product that is right for them. Before investing in a reverse convertible, you should therefore find out about the associated risks. Investors should have a clear market opinion and look for a product that matches their personal risk appetite. My advice: look at the position of the base price in relation to the current share price. The lower this is chosen, the lower the interest coupon and thus the maximum return will be, but the tolerance for one’s own forecasting errors increases. However, a low barrier gives investors a larger buffer against (moderate) falls in the price of the underlying.
Further information on Vontobel’s reverse convertibles can be found at www.certificates.vontobel.com.
About the interviewee:
Heiko Geiger heads the Public Distribution Europe department at Bank Vontobel Europe AG. He has been working in the financial industry for 15 years and was previously responsible for sales and marketing in the index division of Deutsche Börse.