Convertible securities are income-producing corporate bonds or preferred stocks that can be exchanged for common stock at a set price. These hybrid vehicles combine the upside potential of equities with the significant yields of bonds so they’re a conservative way to invest in the financial markets.
On the downside, “converts” won’t gain as much in bull markets as stocks. Nevertheless, their yield component offers protection in downturns. For example, U.S. convertible bonds captured about 90 percent of the Standard & Poor’s 500 Index’s annualized 13.7 percent return over the three decades through 2004, with 75 percent of the volatility, according to investment research firm Ibbotson Associates.
Mutual funds specializing in convertibles have lagged the market this year. Dumping by hedge funds has driven down values throughout the world of convertibles. Thus, they’re well-priced now and may be attractive, going forward. Well-regarded funds holding convertibles include:
- Calamos Growth & Income Fund
- Franklin Convertible Securities Fund
- Vanguard Convertible Securities Fund
