A family of forest farmers and winemakers, the convertible bond specialist Salm-Salm & Partners, focus on social and ecological aspects. Photo: rotofrank Source: iStock

Sought after: convertible bonds offering sustainability

Author: Constantin Prinz zu Salm-Salm und Yvonne Raßbach

The roots of the independent asset manager and convertible bond specialist Salm-Salm & Partners go back more than 800 years to the Prinz Salm vineyard. Even back then, sustainability was an essential building block of success for the traditional family of winemakers. This value runs through the family's history like a golden thread as social and ecological aspects are at the forefront of Salm-Salm & Partners even today.

Constantin Prinz zu Salm-Salm, Managing Partner of Salm-Salm & Partner

In an interview with ChampionsNews, Constantin Prinz zu Salm-Salm, Managing Partner of Salm-Salm & Partners, explains how the fund management measures sustainability. He also describes why the Salm-Salm Sustainability Convertible fund (ISIN LU0535037997 / LU0815454565 ) pursues a strict sustainability approach, and why convertible bonds are so attractive.

ChampionsNews: Your firm is well-known for its convertible bonds. Why have you been consistently pursuing this approach for just short of 30 years?

The ability to predict the market and its ups and downs in a permanently outstanding way is something which neither my father, who established the company in 1990 nor I possess. Instead, our approach is aimed at long-term investments. The adaptability of convertible bonds in conjunction with their asymmetrical payout profile has always seemed highly attractive to us. This applies to a particular degree in the current setting of low-interest rates and above-average stock valuations.

ChampionsNews: What have you learnt over this long period, particularly during the past turbulent year on the markets?

In the long term, it is important to remain loyal to your style and not to be taken off course by short-term volatility. Convertible bonds help to cushion risks. Having said this, for convertible bonds, too, selecting the right individual bonds is of increasing importance because now and then a good deal of regulated cash comes down on investment-grade securities, which lose some of their appeal as a result. In recent years we have taken an increasingly critical view of this development. A correction such as that seen last quarter always serves as a reminder that only those who are willing to tolerate temporary fluctuations will be able to generate above-average income over the long term.

ChampionsNews: Where do you currently see the most significant opportunities -in the market?

As a general rule, we always seek regional and sectoral diversification, and the US market is the most promising for us. Here, there are many technology firms with strong growth rates due to the scalability of their business models. By their nature, convertible bonds are ideally suited to this type of company. This means that the interests of investors and issuers are consistently identical.

Convertible bonds are the only type of bond that is able to offset the negative effects of a rise in interest rates.

Constantin Prinz zu Salm-Salm

ChampionsNews: In your Salm-Salm Sustainability Convertible fund you pursue a very strict sustainability approach. Why is this, and how does it differ from other approaches?

As a family of forest farmers and winemakers, we experience the rapid changes to the environment at our doorstep every single day. Consequently, we believe that there are business areas in which neither our clients nor we must or ought to make profits. Our Salm-Salm Sustainability Convertible fund only takes into account companies listed in the MSCI rating universe. We do not include any business practices and fields that run counter to our understanding of sustainability. This results in a best-of-class approach where only the top 50 percent of securities analysed can be selected.

ChampionsNews: How do you measure your sustainability in economic terms and in the ESG area?

In economic terms, we measure our fund against the usual convertible bond benchmarks and our competitors. It is encouraging to note that even in the niche of convertible bonds, economic and ecological investing can be perfectively compatible and that this approach has even generated an excess yield, which was not necessarily caused by this choice. In addition to publishing economic data, we provide transparent, comprehensive and detailed information on the ESG and climate indicators of this fund, both in monthly fact sheets and on our website. The CO2 footprint of the Salm-Salm Sustainability Convertible fund currently totals only around one-quarter of the benchmark. Many other parameters such as the Industry-Adjusted Score of MSCI ESG Research, are also highly advantageous in a benchmark comparison.

ChampionsNews: Why should an institutional investor invest in convertible bonds today?

Convertible bonds are the only type of bond that is able to offset the negative effects of a rise in interest rates. Due to its long-dated option on the share, the convertible bond has in the past consistently yielded positive returns during phases of rising interest while bonds went substantially down during the same period. Even though we do not anticipate an imminent rate hike, convertible bonds are, we think, substantially more attractive than traditional corporate bonds because the inherent option on the share offers attractive yield opportunities at comparatively low risk even at times of zero interest such as we are living through at present. 

Author: Constantin Prinz zu Salm-Salm und Yvonne Raßbach
Date of issue: 5/7/2019