Convertibles

[smooch]

We have about 12% of our portfolio in Calamos Growth & Income Fund (CVTRX). The Morningstar category is Convertibles. The expense ratio is 1.08%. Is this a good type of fund to be invested in? We have a Financial Advisor who put us into this and I am trying to understand better what we are invested in. Thanks!

[JPatrick]

Your fund is a pretty good performer, but you are paying a load and fairly high fees.* 12% is not unreasonable , but I wouldn't go higher. Converts have done well in the past and should be OK going forward.
If you hadn't already bought it I'd say check out FCVSX and probably others that are equal performers and have lower fees.

[brewer12345]

I think JPatrick answered yor post without actually answering your question .

What the fund owns is equities (about a third) and convertibles bonds and preferred stocks. You presumably know what equities are. Convertible bonds and preferreds (very little difference between them) are fixed income instruments (i.e. bonds) that pay a coupon and either 1) allow the owner to convert the bond into the equity of the issuer or 2) convert into equity at a specified time (mandatory, not an option). The first type (optional converts) allow you to have you cake and eat it too: if the stock goes flat or down, you don't covert and keep it as a bond; if the stock goes up, you can convert or sell the bond which will have increased in price because it tracks the stock. The cost is usually a much lower than market yield on the bond (converts might have yields of 2 or 3%). The second type of convertible (madatory converts) pay a richer coupon and are essentially a higher-yielding form of the underlying equity. The cost is that you usually won't sharre in the appreciation of the stock until it goes above a certain amount. For example, I am looking at a mandatory convert that yields about 7% and converts in 3 years. I won't sharre in teh stock proce appreciation unless the stock is over $30 a share (currently at 27 or so).

[smooch]

Thank you both for your answers. If I am reading your answer correctly, Brewer, we are giving up some yield for the option to convert? I'm still not sure if this is a good type of fund to be in.

[JPatrick]

Whether this is a suitable fund depends on about 101 varables unique to your situation.* Such as, what is the make up of the rest of your portfolio, is your key objective growth or income, and how soon do you anticipate needing this money.
To me, any portfolio that is being constructed for a 5 year plus time window can do very well with this type fund among the 10 percenters.* In the 10 % category I also include REITS, Emerging Markets, Small Country debt.* Other more traditional fund types deserve more than 10 % IMO.
As I noted earlier, your fund has had a nice 5 year run, so if it fits, keep it and hope the run continues.

[preben]

Seen from an asset correlation point of view I believe that convertible volatility/return lies somewhere between equities and bonds. Just something to consider when you decide on your overall equity/fixed income split. Cheers!

[brewer12345]

Quote:

Originally Posted by smooch Thank you both for your answers. If I am reading your answer correctly, Brewer, we are giving up some yield for the option to convert? I'm still not sure if this is a good type of fund to be in.

If we are talking about a convertible bond, generally yes. For example, CCRT just issued a convertible bond due in 2035 with a yield of 5.875% that is convertible into shares of their stock at the option of the bondholder. The bond is not rated, but if it were it would probably be well into junk territory. I would imagine that straight debt from that company would probably have to yield 9 or 10% to get the deal done.

If we are talking about a mandatorily convertible preferred, you probably want to view the security as basically a higher-yielding form of the issuer's equity. I am looking at a preferred that yields about 7% (versus 2% or so for the underlying stock). This security mandatorily converts into the underlying equity in three years.