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Convertibles Screen: High Yield, High Quality Convertibles - March 2014

Generally speaking, companies with solid financial positions make safer investments than those with weak balance sheets. That said, convertibles issued by high quality companies are generally expected to offer lower coupons and small yields when compared to weaker companies.  This quality/yield dynamic, however, isn’t always the case. Indeed, there are some high quality companies that have high yielding convertibles.Read more

Convertibles Screen: Busted Convertibles - January 2014

The conversion feature of a convertible security hardly has any value if the common stock underlying that convertible trades below the effective conversion price. Convertibles in this situation are usually referred to as “busted.” Many fixed-income investors find these so called “busted” convertibles attractive because they often offer a generous yield and appreciation potential, assuming the underlying stock advances.Read more

Convertible Screen: Favorably Leveraged Convertibles

Convertible bonds are hybrid between stocks and bonds. Owning convertibles that are sensitive to the movement of their issuing company’s common stock is a way to potentially increase return and reduce risk compared to owning only the common stock.Read more

Warrant Hedging: A Timely Strategy

The exceptional leverage provided by warrants makes them ideal candidates for hedging. A warrant hedge consists of a long position in a warrant and a short position in the underlying common stock.

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Convertibles as an Asset Class

Investors, searching for safer havens, are pulling out of stocks and investing in bonds and government securities. Indeed, the Dow Jones Bond Average gained 0.8% in January, while our All Convertibles Total Return Index grew 1.8%. Even the government is considering the option of buying “convertible securities from financial institutions,” with bailout money (according to an article in the January 21st Wall Street Journal). Because of their hybrid nature, convertibles could be the ideal investment for investors “hooked” on stocks, as we go through this recession. A convertible has an investment value (a bond value); it pays income, which is generally higher than that of the stock; and the warrant portion gives holders a call option on the underlying stock when equity markets perk up again. And, they are more stable than stocks.

A Convertibles Primer

Convertibles are a niche investment that are, unfortunately, on the outskirts of most investors’ radar screens.  A quick primer, however, might help change that.

Why Convertibles Often Carry Less Risk than Common Stocks

Risk typically increases with potential return. There are, however, some investments that historically have provided larger than expected returns in proportion to the risk of the securities involved. Convertibles fall into this category.