Investment yield, ripe to pick for your portfolio.
A “coco” or “contingent convertible” bond is a type of security issued by banks and insurance companies. They were first issued after the financial crisis, and were designed expressly to help ensure that banks are sufficiently well capitalised to survive another severe shock to the global financial system.
Cocos offer a much higher margin of safety than some investors may realise.
Choose your cocos carefully, and understand your risks.
Cocos offer attractive low correlation characteristics.
Cocos offer a degree of protection from longer term rate hikes.
The investor should select the highest quality and best value issuers, which have the strongest balance sheets and capital generation characteristics. We can focus on cocos that have the lowest likelihood of missing coupon payments. Through detailed analysis of available distributable items and by making forecasts of retentions, the investor can seek to predict whether issuers will have sufficient reserves in the future to pay coupons. We can aim to invest in cocos whose likelihood of conversion is remote.