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The Value Line Convertibles objective group covers mutual funds that invest the majority of their assets in an unusual and relatively obscure asset class—convertible bonds and convertible preferred stocks.  Indeed, convertibles are a mixture of a bond (or a preferred stock) and a warrant to purchase common stock in the issuing company.  This creates a hybrid security with both bond-like and equity-like features.

At times, a convertible bond can trade like a regular bond, based on the underlying company’s ability to make interest payments, interest rates, and other bond-specific factors.  At other times, however, convertibles can trade more like stocks—typically when the value of the conversion feature (the warrant) is greater than the value of the bond.  The end result is that convertibles often provide downside protection because of the bond component of the securities, but also upside participation if the stock price of the issuing company rises (though this participation is usually muted relative to a direct equity purchase).  Investors interested in more information about convertibles should visit the Education page of The Value Line Convertible Survey.

Mutual funds are one of the best ways for individual investors to participate in the convertible market because of the illiquid nature of many convertible securities.  Also, small sales and purchases are often subject to large markups and trading costs, further reducing the benefit of direct purchase.  Indeed, it would be difficult for an individual investor to cost effectively acquire a diversified portfolio at competitive prices.

The convertible market is small relative to the bond market and the stock market. Moreover, many issuing companies in this space are financially weak compared to the broader markets.  Thus, managers here are generally selective in their portfolio construction.  At the end of the day, the funds can be rather eclectic, and each needs to be reviewed carefully.  Some managers tend toward more-aggressive, lower-quality holdings, while others prefer higher-quality investments.  And these tendencies are subject to change based on market conditions. 

Over the long term, the Convertible objective group has been a good performer relative to the broader market, as measured by the Barclays Aggregate Bond Index.  For the 10-year period ended February 28, 2013, the group had an annualized return of 6.2%, while the Barclays Aggregate Bond Index reported an annualized gain of 3.1%.  Over the trailing five and three-year periods through February 28, 2013, the group had gains of 4.4% and 8.1%, respectively, while the Index reported annualized gains of 5.4% and 5.5% respectively.  During the past year, the Convertible objective group reported a gain of 6.2%, compared with a gain of 3.1% for the Index. Year to date through February 28, 2013, the Convertible objective group outperformed the Barclays Aggregate Bond Index.  It reported a return of 3.9% compared with a gain of -0.2% for the Index.   The group has a better-than-average Risk Rank of 2, indicating that funds in this group might appeal to more conservative investors.  

Fund Name: MainStay Convertible Fund A
Ticker: MCOAX
Year-to-Date Return: 4.78%
Objective: Capital appreciation together with current income.
Investment Strategy:
• Up to 80% in convertible securities
• Invests in both investment grade and below-investment grade securities
• May invest in foreign securities


Fund Name: Vanguard Convertible Securities
Ticker: VCVSX
Year-to-Date Return: 4.50%
Objective: Provide current income and long-term capital appreciation.
Investment Strategy:
• Invests at least 80% of its assets in U.S. and foreign convertible securities

Fund Name: Miller Convertible Fund A
Ticker: MCFAX
Year-to-Date Return: 4.18%
Objective: To maximize total return while keeping volatility low and preserving principal.

Investment Strategy:
• Invests at least 80% of its assets in convertible securities of U.S. and foreign companies
• It can invest a significant percentage of its assets in the securities of a single issuer
• May also concentrate its holdings in a particular market sector.

10 Top Convertible Funds Performance

 

Fund Name

Ticker

% Year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

Allianz AGIC Convertible Fund A

ANZAX

5.27

0.27

7.31

9.48

  

MainStay Convertible Fund A

MCOAX

4.78

0.26

6.14

7.22

4.89

Columbia Convertible Securities A

PACIX

4.60

-0.13

6.38

9.01

4.39

Vanguard Convertible Securities  

VCVSX

4.50

0.30

3.24

5.78

5.25

Miller Convertible A

MCFAX

4.18

0.35

6.50

7.61

4.79

Dunham Appreciation & Income A

DAAIX

4.24

-0.44

4.89

5.36

4.69

Calamos  Convertible Fund  

CCVIX

4.14

0.83

4.81

6.12

3.92

Fidelity Convertible Securities

FCVSX

4.28

-0.11

8.30

13.02

4.04

Fidelity Adv Convertible Sec A

FACVX

4.26

-0.11

8.25

12.86

  

Invesco Convertible Sec Tr A

CNSAX

4.12

0.09

6.23

7.97

7.04

Convertible  Objective Group

  

3.91

0.09

5.59

7.40

4.40