Profit From Flexibility

Convertible bond funds offer many of the pluses of stock portfolios with less risk

Convertible bonds were made for times like these. They are a hybrid investment, combining features from both bonds and stocks, which can bolster portfolios in uncertain times. Essentially, convertibles are fixed-income investments that companies issue, which offer the comforting income of a bond, but can also be exchanged for shares of company stock should an investor wish to capitalize on a strong stock market. With the stock market being so volatile in recent years, and with Treasury bills and corporate bonds paying microscopic interest rates, convertible bond fund investors have had a carnival so far in 2003. Morningstar reports that up until May 15 of this year, the average convertible bond fund had roared to a 9.6% gain, even while the Standard & Poor’s 500 posted an impressive gain of 8.23%.

Typically, convertibles are meant to offer some, but not all, of the upside of the stock market while cushioning portfolios during periods when stocks drop in value. Take 1999 for example, a bull year for stocks when the S&P 500 returned investors 29.3%. Convertibles did quite well that year, averaging a 21.0% return. When the market hit the skids and the S&P 500 fell 9.1% in 2000, and 11.9% in 2001, respectively, convertibles fared much better, averaging a 0.5% return in 2000 and falling just 7.9% in 2001.

Morningstar analyst Bradley Sweeney says that although they’re popular now, the category is usually an afterthought for mutual fund companies that often focus on either stock or bond funds. Morningstar stats also show that convertible bond funds are generally more expensive, averaging 1.5% of their assets in expenses, compared to 1.3% for the average large-cap blend fund. Sweeney says it’s important for investors to look for fund companies that have been in the convertible market for a while and know how to navigate when the stock market’s fortunes are rocky.

One company that gets high ratings from Morningstar is Calamos, an outfit in suburban Chicago that focuses on convertibles. Although the company’s flagship offering, the Calamos Convertible fund, is currently closed to new investors, Sweeney says the Calamos Growth & Income Fund (CGIIX) has a large stake in convertible bonds mixed with stocks that make it attractive. It returned 7.1% through May 9 and can boast a five-year average annual total return of 11.6%.
However, Sweeney says there’s a caveat: “Many convertible fund managers I’ve talked to say they are disappointed with some of the issues coming to market in recent months, so there could be somewhat of a drop-off in performance.” That said, a convertible bond fund investment with an experienced firm may provide some upside in a stock market that still has investors scratching their heads.
Top Convertible Bond Funds

Fund Name (Ticker) Expense
Ratio
3-Year
Return*
5-Year
Return*
Phone
Number
Minimum
Investment
Calamos Growth & Income A (CVTRX) 1.30% 2.56% 11.59% 800-823-7386 $1,000
SB Convertible B (SCVSX) 1.81 2.46 0.85 800-451-2010 1,000
Northern Income Equity (NOIEX) 1.00 -0.07 2.67 800-595-9111 2,500
Fidelity Convertible Securities (FCVSX) 0.85 -0.11 7.58 800-544-8888 2,500
Franklin Convertible Securities

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