Editor's note: this is an article from Lombard Odier Investment Managers, one of a number of contributed articles from that firm on investment strategies.

Convertible bonds combine a corporate bond and an option to buy that company’s shares. You get the best of both worlds: exposure to the shares, meaning the investor enjoys market upswings, while the bond itself offers the buffer of regular coupon payments. So performance is dictated by a combination of bond values and what the shares are actually doing. Investors seeking bond volatility and equity upside are starting to sit up and take note.

A special dynamism is evident in the Asian convertible bonds market, the only sizeable market among the emerging regions. Asian companies issued $18 billion of convertible bonds during the first nine months of the year – almost 30 per cent of all convertible bonds issued worldwide.

While Europe's economic outlook is still uncertain and growth in the US is only inching towards recovery, the emerging nations, and Asia in particular, are motoring. Traditionally regarded as export economies, the Asia Pacific region is driving global growth by virtue of its size and GDP increases. This is despite the major Asian economies not having a regular recourse to credit. Credit represents just 13 per cent of GDP in China, compared with a whopping 82 per cent in the UK.

Against this backdrop, convertible bonds are a smart way for investors to latch onto Asian growth, allowing them to benefit from stock market rallies but with a "parachute" effect in the event of a decline in share value. They offer an attractive rate of return, inexpensive options, and with a total market value of some $67 billion, the Asian convertible bond market is a dynamic and varied one.

Another characteristic of this market is that a large proportion of the bonds issued are not rated, even if the issuing companies are subject to a rating (S&P, Moody’s, or Fitch). This can be explained by the fact that investors do not require an explicit rating for convertible bonds and that, compared with US or European issues, the majority of Asian convertible bond issues have short durations (since the issues have an early redemption option after three years, the average portfolio duration can be 2.5 years). The absence of a rating is not, however, an indication of poor quality. Indeed, a number of issuers are blue chip, regional companies.

Asian convertible bonds are proving their worth. They posted a performance of +9.6 per cent in 2010 (measured against the UBS Global Convertibles Asia ex-Japan index) and a cumulative performance of +59.4 per cent over the past five years. By comparison, the UBS Global Convertibles index rose just +4.8 per cent in 2010 and +28.8 per cent over the last five years.

The impressive performance of Asian convertible bonds over the first nine months of 2010 is, in part, due to a narrowing perception of what is risky and what is safe, which is a reflection of the flourishing health of the Asian economies and the region’s balance sheet restructuring.

Asian convertible bond performance is also superior in real terms to those of global equities and saw only a fraction of the volatility: annual volatility of convertible bonds over the last five years is 16.5 per cent, compared to 28 per cent for equities.

Convertible bonds currently offer an attractive proposition and serve as a useful tool for boosting a varied portfolio of investments. They allow investors to take advantage of the potential offered by the burgeoning economies of the Asia region without being exposed to all of the risk.