Aviva Investors, the asset management arm of UK–based insurance firm Aviva, have launched their Convertible Bond Opportunity Fund, which aims to provide institutional investors with income and capital growth by taking advantage of the discounts available on convertibles. The fund’s managers believe the financial crisis has left these bonds undervalued.

The managers - David Clott, Shawn Mato and Tom Wills -  will invest in investment-grade convertible bonds issued worldwide, with no restrictions on region.  They will not use leverage or invest in securities other than convertible bonds.

“At the start of 2008, we estimate around 70 per cent of convertible bond funds were owned by hedge funds, though many of these have since been forced to sell as a result of investor redemptions and the ban on short-selling. 

"This widespread forced selling has created a dramatic mis-pricing in the convertible bonds market, with many trading at substantial discounts to fair value,” said Mr Clott.

“We believe this opportunity will be relatively short-lived as these prices could return towards fair value quite quickly.  As a result, there may only be a short window of opportunity to secure the best-priced bonds and hold them to maturity over a three-year period,” he added.

The Aviva Investors Convertible Bond Opportunity Fund will be open for one month starting on 5 January 2009. It will be structured as a closed-ended Luxembourg-domiciled Aviva Investors SICAV- SIF.

At the fund inception, it will invest in between 20 and 50 global investment grade securities, with the majority likely to be US companies. Securities will be held for a short duration to maturity, on average about two and a half years, giving relatively low volatility and a greater likelihood of reaching the performance objective.

Aviva’s principal business activities are long-term savings, fund management and general insurance, with worldwide total sales of £49.2 billion at 31 December 2007 and funds under management of £359 billion at 30 June 2008, of which £235 billion is managed by Aviva Investors.

In November, FairPensions, a campaigning organisation for socially responsible investment, published a survey of UK fund managers that showed Aviva is one of the top performers on ESG issues, such as avoidance of irresponsible lending or environmentally destructive business activity.

Aviva operates under a single brand with more than 1,100 employees in 21 locations across Asia Pacific, Europe, North America and United Kingdom.