DNCA Invest Convertibles

September was marked by another rise in interest rates amid an environment characterized by resilient economic activity and persistent inflationary pressures, driven in particular by rising energy prices. In the United States, the Federal Reserve raised its benchmark rate by 25 basis points, while in Europe, the ECB also raised its rate by 25 basis points, bringing its deposit rate to 2.5%. European economic indicators nevertheless remained strong, with the eurozone composite PMI rising to 53.1 in September. Against this backdrop, long-term rates continued to rise, and European equity markets stalled. Sectoral divergence remained significant: energy and technology outperformed, while basic materials and consumer staples struggled more. The artificial intelligence sector remained particularly buoyant, supported by continued massive investment in computing capacity and related infrastructure. In this environment, the European primary market for convertible bonds was dynamic, with seven transactions totaling €2.5 billion.

Since the beginning of the year, the DNCA Invest Convertibles fund has posted a return of 7.02%, compared with 5.51% for its benchmark, the Refinitiv Europe Focus Hedged CB (EUR). In the primary market, we participated in six fairly valued investments that allowed us to re-establish a measured exposure to diversified underlying equities: BW LPG 2031, Accor 2032, Deutsche Boerse 2031, Porr AG Perp, Harmony Gold Mining 2031, and Soitec 2033. In the secondary market, we increased our holdings of the Legrand 2033 bond ahead of the figures released during its investor day, as well as in Evonik Group securities, which are benefiting from credible consolidation interest from BASF. Conversely, a significant reduction in holdings was made in the real estate sector, which is suffering from the worrying trends observed in the fixed-income market (Vonovia 2032, Leg Immobilien 2030, TAG Immobilien 2031, and Simon/Klepierre 2026). Partial profit-taking was also carried out on the following cyclical investments: K+S 2031, BNP Paribas 2031, Voestalpine 2028, and Schneider Electric 2033.

In this environment of rising interest rates and wide performance dispersion, we continue to favor convertible bonds that offer the most attractive convexity profiles and are capable of cushioning the impact of erratic market phases. Their valuation continues to provide a technical buffer against equity market fluctuations. Furthermore, ongoing investments in artificial intelligence and related infrastructure continue to present opportunities within this sector, though they require greater selectivity given the valuation levels reached by certain securities. The asset class continues to grow and has, in fact, surpassed a symbolic record threshold of $600 billion. The portfolio maintains a balanced positioning, with equity market sensitivity nearing 40%. Exposure to investment-grade issuers accounts for the vast majority, while cash represents approximately 7% of the portfolio. This cash position allows us to maintain the flexibility needed to capitalize on new opportunities in both the primary and secondary markets.