Q1 2026 Wellesley Convertibles Commentary

Q1 Market Review

For the first two months of the quarter, markets were relatively calm, with limited volatility across asset classes. That changed in March when the U.S. launched military operations in Iran, introducing significant geopolitical uncertainty. Oil prices surged, equity markets declined, and bond yields moved higher as volatility increased. Throughout the month, markets reacted sharply to developments in the Middle East, and by quarter-end, equities were nearing correction territory while bond yields were modestly higher.

In this environment, our clients’ SMA convertible bond portfolios delivered slightly positive returns while mutual fund performance was mixed. This compared to equities, which declined by over 4%, and bonds, which were broadly flat. Higher volatility and effective bond selection supported performance, while rising interest rates and wider credit spreads were headwinds. At the start of the year, markets expected two to three interest rate cuts, but stronger employment data and higher oil prices led to a shift in expectations. As a result, the yield curve flattened and the likelihood of rate cuts declined.

Fund Review

The Wellesley Convertible Strategy invests in convertible bonds and is differentiated by its conservative approach which emphasizes preservation of capital and company quality. Upside equity participation is a secondary factor. During the quarter, we exited positions that had appreciated significantly due to strong equity performance. We also sold bonds that had underperformed and had become more credit sensitive. By quarter end, the fund had a more balanced profile with most of the holdings trading near par value.

Performance Drivers

The strategy was flat for the quarter, in line with the Bloomberg US Aggregate index. Convertible security selection contributed positively to performance, while higher interest rates and widening credit spreads detracted. The fund outperformed the conservative ICE Bank of America Yield Alternatives Index but underperformed the equity sensitive ICE Bank of America US Convertible ex Mandatory Index.

Outlook

As the quarter ended, there was little indication of an imminent resolution to the conflict in the Middle East. Should tensions persist, it is reasonable to expect that financial markets will continue to experience elevated volatility and episodic risk aversion. In such an environment, we believe the investment case for convertible bonds remains compelling. The hybrid nature of these instruments—combining features of both equity and fixed income—positions them uniquely to navigate uncertain market conditions. Convertible bonds offer the potential for equity participation during periods of market strength, while their bond component provides a degree of risk management when equity markets decline. As equities trend lower with increased volatility, our clients are benefiting from the asset class’s ability to preserve capital and reduce overall portfolio volatility.

Sincerely,

Important Disclosures

Past Performance is not indicative of future returns.

Investments in convertible securities are subject to the risks associated with both fixed-income securities and common stocks. All fixed-income securities are subject to two types or risk: credit risk and interest rate risk. Lower rated fixed-income securities are subject to greater risk of loss of income and principal than higher-rated securities. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. In general, stock and other equity security values fluctuate, and sometimes widely fluctuate, in response to activities specific to the company as well as general market, economic and political conditions.

This presentation is meant for broad discussion purposes only and is not intended as a recommendation to buy or sell any security. The reader should not rely on this information for investment purposes. An investment in convertible securities involves a risk of loss. The value of an investment in convertible securities may decrease as well as increase.

Index Descriptions:
Indexes do not include management fees, transaction costs or other expenses. You cannot invest directly in an index. The ICE BofA Yield Alternatives Index refers to a category of indexes tracking the performance of non-traditional, higher-yielding securities, often including U.S. dollar-denominated fixed-rate preferreds, contingent capital securities, and other income-generating instruments. These indices measure income opportunities outside of traditional investment-grade corporate bonds or treasuries, focusing on below-investment-grade or hybrid debt issued in U.S. domestic markets. The Bank of America US Convertible ex Mandatory Index is a financial benchmark that measures the performance of the U.S. dollar-denominated convertible securities market while specifically excluding mandatory convertible securities. The Bloomberg U.S. Aggregate Bond Index (often called "the Agg") is a flagship benchmark that measures the performance of the U.S. investment-grade, fixed-rate, taxable bond market. It is the most widely followed barometer for the overall health of the U.S. bond market and serves as the standard reference for bond mutual funds and ETFs.  

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