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Maybe you suffered a touch of acrophobia, a fear of heights, once the Dow hit 6,000. It could be that you re cautious about planting cash in the stock market after such a long bull run. Or perhaps you’re just looking for a relatively conservative place for the next sum you invest. Whatever the reason, convertible bond funds are worth considering.
Convertible bonds are something of a hybrid investment, combining the steady yield of bonds and the capital appreciation possibilities of stocks. Companies that issue convertibles promise to pay holders a fixed yield, but at the same time allow investors the option to exchange the bonds for a set number of shares.
The two main qualities of convertibles–bond-like steady income payments and stock-like growth–provide investors with a good hedge at a time when stocks might seem expensive or the direction of interest rates might be uncertain.
“Since convertibles capture the best of both bonds and stocks, they’re a sound conservative investment,” says Matthew Muehlbauer, a research manager at New York-based Value Line Inc. who tracks convertible bond funds. “They won’t get every bit of capital appreciation like a stock, and not all the income a bond will–but they come very close, and won’t be as risky, either.”
Let’s say Acme Corp. issues convertibles yielding 10% annually. Acme shares begin to zoom on the stock exchange. You simply convert your bond into shares. If Acme stock seems lethargic at best, you can stick with your bond investment and see a regular 10% payment on your money.
Investing in a mutual fund is perhaps the easiest way to tap into the convertible market. Mutual funds offer investors such benefits as a diversified portfolio, limiting their exposure to any one investment. Convertibles can be rather difficult for individual investors to trade profitably, since volume in the convertible market is thin and convertibles’ value depend on complicated calculations of yield and conversion value.
Still, convertible funds have compiled an impressive record by any stock picker’s standards. According to a mutual fund survey conducted by Value Line, convertible bond funds have averaged a 12% total return the last five years on an annualized basis, compared with 13% for growth and growth-income funds, 12% for income funds and 15% for the S&P 500. As far as bond funds go, convertibles well outlegged the competition, including corporate high-yield, international, even government bond funds.
BE scanned the 33 convertible funds Value Line tracks, looking for strong long-term track records, solid yields and ability to weather tough times. Here are a few interesting no-load candidates that won’t nick the total return of your investment with investment company low fees:
Fidelity Convertible Securities (800-544-3902), while up only 8.91% for the first nine months of 1996, this fund had the strongest showing, with a five-year annualized total return of 14.27% and a healthy current yield of 4.32%. Fidelity’s fund also fared reasonably well in 1994, losing only 1.76% in a rough year for both stock and bond markets. Fidelity requires a minimum initial investment of $2,500; for IRA