June 30, 2003

These Funds Are Making a Conversion of Sorts

An excerpt from the June 27, 2003, edition of The

Convertible bond mutual funds specialize in buying securities that start life as bonds and later can change into stocks. But recently it has been some convertible bond managers who have been converting their entire funds into something new.

Calamos Investments, a convertible bond specialist that is one of the best known investors in the securities, earlier this year dropped the word "convertible" from the names of its $1.6 billion Calamos Growth & Income/A (CVTRX) and $51 million Calamos Global Convertible Fund. And in a few days, the $200 million Davis Convertible Securities/A (RPFCX) will give its name an overhaul and start calling itself the Davis Appreciation & Income Fund.

Why the conversions of these convertible funds?

In a letter to fund shareholders, Calamos founder John Calamos explained that the changing state of the convertible bond market was "making it difficult to find appropriate (convertible) holdings" for his firm's funds. Jason Voss, a portfolio manager for the Davis fund, puts it more bluntly: "There's no way you'll ever make money" in some of the new convertible bonds available to mutual fund investors today, he says.

While 2003 has been stellar for new convertible bonds being issued by companies and a strong year for investment gains in convertible issues -- the average convertible fund has gained 12% this year -- a number of convertible funds are saying they have to look at other types of securities to fill out their portfolios. The main reason: many of the convertible bonds being sold by companies today are designed to appeal more to hedge fund managers than mutual fund managers.

So funds like the Davis and Calamos portfolios are amending their investment mandates to include other types of securities beyond convertibles. Such changes pose questions for investors, especially those who have purchased the funds specifically due to the portfolios' focus on convertible securities. And while the Calamos and Davis funds plan to include convertibles as a major part of their strategies, investors need to consider that their track records were accumulated with an investing style that has since been altered.

Even with the changes in the convertible market recently, investors have been flocking to convertible funds. The two dozen or so convertible mutual funds available have attracted more than $1 billion in new assets this year through April 30, nearly quadrupling the new money that flowed into the sector during the first four months of 2002.

Convertible bonds have proven an attractive niche for investors who like to get both the price potential of a stock and the interest income of a bond. Convertible securities are sold to investors as bonds, which pay interest and promise to repay the principal at the bond's maturity.

Reprints Discuss this story
This is where the comments go.