Convertible bonds and convertible preferred stocks (“converts”) are fixed-income securities with yields a bit lower than straight bonds of similar credit quality and maturity. In return for accepting a lower yield, investors hold an equity kicker: converts may be traded in for a certain number of shares of the issuer’s common stock.
The conventional wisdom among proponents is that converts produce about 75% of the returns of the stock market with perhaps 50% of the risk. Indeed, many mutual funds specializing in convertibles held up reasonably well in 2000, a year when the major stock market averages plunged.
As a category, convertible funds broke even in 2000, but that statistic covered a wide range of performance. Several funds, including Franklin Convertible Securities (800-342-5236), Nations Convertible Securities (800-321-7854), and Victory Convertible Securities (800-539-3863), wound up the year with total returns of 14%-15%, providing a welcome haven for investors.
Generally, the funds that did well last year went for portfolio diversification (less exposure to technology) and higher credit quality among the securities they owned.