Convertibles Make The Difference

Tracy Maitland's convertible securities strategy lessened market risk

Last year, BLACK ENTERPRISE took a look at convertible securities with Tracy V. Maitland, president of New York-based Advent Capital Management L.L.C., ranked No. 17 on the BE ASSET MANAGERS list with $1 billion in assets under management. Convertible securities are fixed-income instruments (either bonds or preferred shares) that can be converted into common stock. Maitland, who is one of the best in the this area, says the benefit of convertibles is that they can be “a great way for an individual to invest in the market and generate equity-like returns with more of a fixed-income risk profile.”

Since you can either keep the convertible security or convert it to stock, we looked at the performance of both (see chart). If you exercised all of the convertibles, you would have enjoyed a 7.3% gain. However, had you simply purchased the stocks, you would have suffered a 13.6% loss — not bad considering the severity of the current bear market. In contrast, the Dow Jones industrial average suffered a 16.58% loss and the Standard & Poor’s 500 was down 24.06% over the 52-week period from Aug. 10, 2001, to Aug. 12, 2002.

Barry Nelson, a senior vice president at Advent, says what helped Maitland’s performance was that “two of the five stocks appreciated despite the adverse stock market.” The BISYS Group (NYSE: BSG) and First Data Corp. (NYSE: FDC) enjoyed 2-for-1 stock splits since last year. While the BISYS Group, which provides outsourcing services to financial institutions, adjusted to its move from the Nasdaq Composite index to the New York Stock Exchange (its former ticker symbol was BSYS), the 4% convertible bond helped cushion the overall decline of its stock. The convertible returned a loss of 3.6%, much better results than the 16.9% loss on the stock.

First Data Corp., the largest credit card processing firm in the U.S., was a steady performer in this turbulent market. The 2% convertible bond provided a slightly higher return than the stock — the convertible gained 4.7% vs. 1.2% on the stock.

The 5.25% convertible bond for Lamar Advertising (Nasdaq: LAMR) showed again how this asset class protects the investors if a stock goes south. Although the stock for this leader in outdoor advertising fell 20.8%, the convertible lost just 5.4%.

The $2.625 convertible preferred stock that Maitland recommended for Western Gas Resources (NYSE: WGR) demonstrates how convertibles can increase the value of an investment even when it does well. While the stock of this provider of natural gas gained a healthy 8%, the convertible almost doubled that return with a gain of 15.6%.

Finally, the 5% convertible for COR Therapeutics (Nasdaq: CORR) became a fantastic hedge against the losses produced by the stock after the company was acquired by Millennium Pharmaceuticals (Nasdaq: MLNM), a leading pharmaceutical company. “An unusual feature of the COR 5% bond is that it can be sold back to the company at $108.50 on April 29, 2003, which has caused the bond to appreciate despite the decline of the underlying stock,” says Maitland. The convertible, (now

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