Advent Capital was founded in 1996 by Tracy V. Maitland, who had previously been a director in the convertible securities department of Merrill Lynch (now BAML). Today Advent runs just over $9 billion with some strategies exclusively focused on convertibles, while others allocate across the capital structure. The asset manager has steadily diversified into three synergistic business areas: it manages roughly $7 billion in long-only funds, primarily investing in convertibles (with some straight high yield debt); over $1 billion in three closed-end funds listed on the NYSE, and approximately $400 million in alternatives, including absolute return funds, hedge funds and liquid alternatives.
Of 60 staff, mainly in New York and London, 25 are investment professionals, whose original corporate research is the core Advent competence running through all business areas. “The analyst team cover sectors, sub-sectors and geographies. They use both sides of the brain in analysing income statements and balance sheets,” says Advent COO, Kris Haber. Joined-up thinking means that the team spans the whole capital structure, including straight debt, convertibles and equity. The synergy among the business sleeves is garnered by the applicability of this research to any of Advent’s existing investment strategies and vehicles, or indeed the new ones being rolled out. “By understanding the various components across the capital structure, you are more knowledgeable about relative value, and long and short opportunities that exist,” Haber says.
Convertibles sweet spot
Now, in early 2017, Advent has authored a paper entitled Trump Era: Why Investing in Convertibles Makes Sense, highlighting the strong opportunity set for its trademarkasset class. Convertibles have been a constant in the career of Advent Alternatives Portfolio Manager, Douglas Teresko. After business school in the 1990s, he joined Citadel Investment Group to work on the convertible arbitrage and capital structure arbitrage desks, and later managed similar strategies at DKR Capital. Moving to the Credit Suisse global proprietary desk, his repertoire widened to include credit, volatility, relative value equity and long/short equity, while he continued with convertible arbitrage and capital structure arbitrage.
Today Teresko co-manages an event-oriented hedge fund strategy focused on relative value credit and volatility. His experience suggests that higher interest rates bode well for convertibles, and three Fed rate rises are now the consensus expectation for 2017. Teresko stresses that Advent’s hedge fund is not a macro fund, and hedges interest rate risk rather than expressing views on rates. It is the second-order effects of higher rates – in spawning more convertible issuance – that are germane. “There are a variety of reasons a company would be willing to issue convertible bonds. The principal rationale would be to reduce a company’s overall debt-to-capital ratio or to equitise a company’s balance sheet at some point in the future at a higher valuation. Another reason may include the ability to take advantage of relatively lower coupon payments,” Teresko says. Higher rates increase the amount that companies can save by issuing convertible debt versus pari passu straight debt. “Increased issuance of convertible debt improves the opportunity set on both a hedged and an outright basis,” Teresko explains.
Advent also holds the conviction that equity volatility should increase, in both directions, due to uncertainty over the timing and likelihood of the materialisation of the new American administration’s policy aims. Already, Trump’s cabinet nominees have apparently contradicted his stated views on many issues. Teresko’s view is that “the policy agenda may not move in a straight line and some policies may not get implemented at all.” Heightened equity volatility might not help some investment strategies, but for convertibles on either a hedged or outright basis, upside and downside volatility can be accretive. Most directly, it could increase the valuation ascribed to the call options embedded in convertibles.
Additionally, Teresko aims to “monetise the volatility” through one of the hedge fund sub-strategies, gamma trading. Convertible managers can opportunistically reconfigure their portfolios to emphasise themes such as mispriced credit, corporate events, or mispriced volatility, and in early 2017 Teresko is of the opinion that volatility is highly mispriced. A double discount exists: the valuation of implied volatility, reflected in convertible options, trades at a discount to recent realised volatility, and Teresko expects the latter to pick up over a two- to three-year timeframe. The event sub-strategy could also become more active if corporate capital repatriation leads to more merger and acquisition activity, which can provide windfall gains for convertible bonds that contain takeover protection.
If Teresko has greatest confidence in an upward trajectory for interest rates and equity volatility, he is more agnostic on the economic and credit cycles. Many observers do expect that Trump’s policies could accelerate US economic growth and extend the credit cycle – both of which would benefit convertibles. Teresko argues that some policies could create a mix of winners and losers among individual companies and industries, with increased dispersion enlarging scope to generate alpha through security selection.
UCITS, equities and private debt
Advent is renowned for its expertise in convertibles, and COO Haber has set his sights on further expanding the firm’s franchise into other asset classes and strategies. Haber – who devotes a portion of his time to scouting for synergistic new teams and products – has big ambitions to further leverage the firm’s research resources over time, with possible product launches including long/short credit, long/short equity, and private credit.
Haber has been a serial business builder for more than 20 years in asset management. He spent 14 years at Lazard, rising to Managing Director, Head of Alternatives and reflects on “helping them to strategically build out hedge products, launches and asset raises, and source management teams.” Haber then had a stint at Threadneedle, helping to orchestrate a merger with Boston’s Columbia, whose mutual parent is one of the world’s largest asset managers, Ameriprise Financial of Minneapolis. Before joining Advent, he helped to grow the Presidio Capital Group macro business from $17 million to $230 million of assets and then sold it.
Haber has confidence in Advent’s growth potential because the firm boasts a foundation of institutional infrastructure. Haber finds that “the barriers to entry are very high. Even with great performance it can be hard to grow.” Advent has more than doubled its assets over the past four years, adding an average of $1 billion per year, and teams have grown in tandem. Most recently, Advent hired Michael Cavanaugh as Managing Director in the Boston office from another convertible manager. Cavanaugh has strong relationships with institutional investors and investment consultants. Advent now has twelve staff in its client servicing unit, which can provide customised reporting: “Clients can get a variety of performance attribution reports that slice and dice in many ways, such as by sector, sub-sector and geography,” Haber says. Advent has also invested resources in developing rigorous risk management to meet institutional investors’ demands. “Risk management is paramount,” stresses Haber. Teresko “sits next to the risk team, and has an hour-to-hour and minute- to-minute dialogue on intended and unintended risks, with position sizing and stop-loss limits monitored.”
Advent offers managed accounts and has already demonstrated its ability to launch new products, with a high yield strategy rolled out six years ago. Advent is active in liquid alternatives, sub-advising a ’40 Act fund, the Transamerica Event Driven Fund. An Irish-domiciled UCITS launch is slated for early 2017. This will pursue the same multi-strategy approach as Advent’s “Global Partners” strategy, which is currently offered only through a private fund structure. Strategies include volatility arbitrage, event-driven and fundamental investing with publicly traded asset classes – convertible bonds, equities, equity-linked, corporate debt – traversing the full capital structure.
Private credit and private convertibles are priorities for Advent’s expansion and are “a logical extension of our research on companies,” says Haber. “Advent sees a steady stream of deals in both of these areas and is strategically considering organising a vehicle that can take advantage of these longer-term opportunities.” Given that many banks have stopped lending to some companies, he expects that “a whole crop of new managers can be successful in asset-based lending, workouts, special situations and distressed.” Advent feels that private convertibles have a unique contribution to make. “The firm’s analysts, as a function of the work they conduct in publicly traded converts, find opportunities in the private space but cannot deploy capital,” says Haber. This should soon change as Haber is engaged in dialogue with potential teams. Investors should watch this space.