The asymmetric return profile of convertible bonds may prove attractive in today’s uneven macro backdrop – by Dorian Carrell, Fund Manager
Convertible bonds give investors the opportunity to gain exposure to long-term growth while retaining a degree of downside protection, at a time when markets have become increasingly concentrated. By combining bond-like features with the ability to participate in equity upside, convertibles help to bridge the gap between traditional fixed income and equity market exposure.
That balance looks increasingly valuable today. After years of loose monetary policy, expansive government spending and rising populism, investors may well be facing a world where inflation becomes structurally embedded.
Why does this matter? In inflationary periods, traditional fixed income may struggle to generate adequate real returns to preserve wealth. At the same time, exuberance appears to be creeping back, with some equity market valuations dislocating from fundamentals, paired with a narrow group of highly valued companies dominating returns.
Investors therefore face a difficult trade-off: staying out of equities risks missing out on potential growth, but pure equity exposure can leave portfolios vulnerable if sentiment turns. Happily, convertible bonds offer a welcome middle ground, allowing investors to participate in some of the upside while retaining more defensive bond like characteristics throughout the investment journey.
Downside protection and upside potential
Legally, convertibles are senior unsecured bonds, ranking alongside mainstream credit. This seniority introduces downside protection through what is known as the bond floor. Put simply, investors can typically expect, at minimum, to have their capital returned after three to five years.
Source: Schroders, June 2026
With security comes a trade-off in potential upside capture, but this looks like a reasonable compromise for investors to improve risk adjusted returns.
Convertibles are helpful diversifiers
Source: BofA Global Research, 31 May 2026
Convertibles sit between credit and equity: typically, they show low correlation to government bonds, moderate correlation to investment grade credit, and higher correlation to high yield credit and equities, reflecting their hybrid return profile and ability to capture equity upside.
Convertibles in practice
Convertibles’ attractive risk/return characteristics are borne out by analysis of their returns across different market environments. Our analysis shows that convertible bonds have historically captured 81% of the upside of equities in rising markets, but only 60% of the downside in falling markets.
Strong risk-adjusted returns – the sweet spot between credit and equities
Source: Global Equities: MSCI ACWI. Global Convertibles: FTSE Global Convertible Index. Data bars show average quarterly returns, quarter counts based on historical analysis (1994–2025). For illustrative purposes only and not to be seen as a recommendation to buy or sell securities.
This appealing risk return profile (often referred to as asymmetry) can come into its own in volatile market environments, helping investors who want exposure to equity upside without taking on full equity risk. In today’s backdrop of geopolitical uncertainty, possible monetary policy divergence and persistently elevated equity valuations, we believe their balanced profile is likely to be especially useful.
Inflation protection
The chart below illustrates how convertibles can perform in inflationary periods versus fixed income and equity.
Source: Schroders, June 2026
A smoother journey – security example
The chart below illustrates downside protection in action using Exail Technologies to demonstrate how convertibles can help reduce downside risk.
Source: Schroders, June 2026. Any reference to regions/ countries/ sectors/ stocks/ securities is for illustrative purposes only and not a recommendation to buy or sell any financial instruments or adopt a specific investment strategy. Past performance is not a guide to future performance and may not be repeated.
Go global for a wider opportunity set
Convertible bonds have a long history of helping companies finance periods of major innovation and growth. The asset class originated in the US in the 19th century, when railway companies were looking for flexible ways to raise capital during one of the most important infrastructure buildouts of the era. However, convertibles today are far from a US-only opportunity, offering more diversified regional security level exposure than traditional equity indices.
That global reach feels especially relevant today. From the global AI buildout to the race for rare earths, energy security and other critical resources, we are living through a period of extraordinary investment and innovation. For issuers, convertibles can offer a cheaper source of financing than traditional debt through a lower coupon. For investors, that lower coupon is balanced by the potential to participate in future equity upside if the company succeeds.
Taking a global approach to convertibles gives investors access to a broader opportunity set across sectors, regions and themes. It also creates scope for active investors to be selective, rather than relying on static allocations or passive exposures that may be concentrated in a single region. In a fragmenting world, with interest rates, geopolitics and valuations pulling markets in different directions, convertibles offer a compelling combination: participation in future growth, flexibility across markets and a degree of bond-like stability to help investors navigate the uneven path ahead.
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.
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