These Funds Are Making a Conversion of Sorts

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.