The JP Morgan Global Convertibles Income fund placed an offer for subscription on 17 May 2013, which will close on 5 June for shares to begin trading on 11 June.
Domiciled in Guernsey, the fund will have a global remit and will differ from other closed-ended funds by aiming for dividend income by investing in covertible bonds – which can be turned into company shares at a future date – from a wide range of sectors. It will offer income as well as the potential for long-term capital growth.
The company hopes to raise at least £100m, with a minimum investment of £1,000 applicable. The issue price per share is set at 100p, with the opening net asset value per share at least 98p.
The fund will be managed by JP Morgan’s convertible bond team, headed by Antony Vallee. An initial gross dividend yield of 4.5 per cent is targeted for the first year, with income being paid half-yearly at first before moving to quarterly from the second year onwards.
An annual management fee of 0.75 per cent will apply.
Convertibles have not been at the top of investors’ priority lists for some years. JP Morgan believes it is time for a turnaround; their equity sensitivity should benefit from the rallies in equity markets, while bond protection should safeguard against any setbacks, it says. In other words, they offer the best of both worlds.
So why are they being overlooked? $26.7bn worth of convertibles has already been issued this year, an amount that will, if continuing on the same trajectory, outdo both 2011 and 2012. Companies struggling to access finance via standard routes are beginning to clock on to convertibles as an alternative.
The issue for investors is that convertibles must be well-managed. As JP Morgan itself recognises, a closed-ended structure has particular benefits for convertibles since it gives the managers freedom to invest without the worry of great outflows. Convertibles often have a lower coupon rate to offset the conversion possibility; a manager targeting an objective of long-term capital growth alongside income must be wary of getting the balance right.
Companies with a low credit rating and high growth potential tend to offer convertibles; this fund could therefore be seen as an opportunity to access growth stocks. With standard bonds becoming increasingly expensive and caution remaining around equity income, convertibles may well be the way investors look to bridge the income gap.