Why are U-turns inevitably “humiliating”, “damaging” or “panic-induced” when performed by politicians and chief executives of FTSE 100 companies, but generally deemed prudent (if often illegal) manoeuvres when pulled off by cab drivers? Gordon Brown and Sir Fred Goodwin of Royal Bank of Scotland may well have mused on that distinction when trudging along Downing Street this week, but the answer appears simple. Back-benchers and investors value certainty more highly than a few hundred pounds taxed at 10 per cent, or an unwanted opportunity to buy more shares in Royal Bank of Scotland at a 46 per cent discount.

But, arguably, in today’s economic environment, certainty is a more over-
valued commodity than wheat, corn or rice. Behavioural psychologists will say it’s all down to the “expert heuristic”, whereby an outward certainty inflates the perceived credibility of the information being imparted. I would say it’s just because politicians, chief executives – and, for that matter, analysts, fund managers and financial journalists – can’t bring themselves to admit “I’m not sure about this”.

If ever there was a market when not being sure was appropriate, though, it’s surely this one. And with all economists, bar the Federal Reserve’s, now expecting a US recession to be more U-shaped than V-shaped, the ability to execute a U-turn would seem useful for investors.

So it was timely that this week also saw JP Morgan Asset Management launching a new fund that makes a virtue of a change in direction. Rather than requiring investors to be certain, right now, about whether to look to equities or bonds, it will instead take a Janus-like position in convertibles: corporate bonds with a fixed maturity date and a fixed interest payment – or “coupon” – that can be turned into the ordinary shares of the issuing company at a fixed price, at a later date.

Convertibles have long been overlooked in the UK as an asset class for uncertain times, with domestic investors tending to make a binary choice between income-generating cash, bonds and property – or equity derivatives.

In continental Europe, however, where there has been a stronger bond culture, and a wider cultural acceptance of the “comme çi, comme ça” outlook, convertibles represent the acceptable face of hedging – wrapping what is effectively a put option in a good old-fashioned loan stock.

JP Morgan already operates a €1.6bn European convertible fund as a Luxembourg SICAV, which has enjoyed top quartile performance over six months to three years.

Conditions in both credit and equity markets certainly make the turning circle of these convertibles look nifty. Yields on convertible bonds are lower than those on gilts, at less than 4 per cent, reflecting their slightly higher risk and the value of their convertibility. Redemption yields are even lower, of course, as the bonds will only be repaid at face value, but prices in the market carry that conversion premium. But even then, redemption yields will often be positive – meaning that you are effectively being paid to wait for better equity markets.

Waiting has further compensations, too. Convertibles provide a return even when the price of the issuing company’s shares is falling, and gain value when the price of those shares is rising – making them suited to periods of correction and recovery. What’s more, because of their built-in option component, convertible prices increase as equity volatility rises – as the option to convert them into shares becomes potentially more valuable.

Unlike options contracts, however, convertibles give you plenty of time to make up your mind – maturity dates are years rather than months away. Also unlike options, you earn interest and get your money back if you don’t exercise them.

But as many do get converted rather than redeemed, convertibles are less sensitive to any deterioration in an issuer’s perceived credit quality.

There are plenty of issuers to choose from. In 2007, convertible issuance hit an all-time high of $183bn, as companies found it harder to secure other forms of debt financing but needed to restore capital following subprime-related writedowns.

Investors shouldn’t expect speedy performance, though. Convertibles will always underperform equities in a strong bull run and, last year, returns were only slightly better than those from conventional bonds – the annualised performance of JP Morgan’s Luxembourg fund over three years is only 5.91 per cent. That said, convertibles have outperformed both equities and bonds on an annualised basis over the past 10 years.

As with U-turns in Westminster or Edinburgh streets, timing a bond conversion is everything. Changing direction at the wrong time can prove costly. But at least you don’t have to sit in equity and credit market gridlock going nowhere.

matthew.vincent@ft.com