Convertible securities and mutual funds that invest in them have had a tough time this year, but money managers say that’s given them incentive to buy.
The 30 convertible securities funds tracked by Standard & Poor’s were down an average 2.3% through June 30. By comparison, domestic stock funds slid 0.3% and high-quality corporate bond funds rose 1.5% on average during that span.
“It’s been a difficult year,” Stephen Boesel, the manager of the $6-billion T Rowe Price Capital Appreciation Fund (PRWCX), said of convertibles, which account for about 15% of its assets.
Convertibles are bonds or preferred stock that can be converted into a predetermined number of shares of common stock. The hybrid securities typically have lower dividend yields than regular bonds, but they can make money because of the underlying stock.
What Your Peers Are Reading
The asset class suffered in the first half of the year because the stock and bond markets were relatively weak for large chunks of the period, Boesel said.
Convertibles went through “something in between a sharp correction and a bear market” that started in mid-March and ran through the second quarter, said David King, lead manager of the $700-million Putnam Convertible Income Growth Trust/A (PCONX).
King attributed the problem partly to weakness in the broad stock market, as opposed to the segments represented in the Dow Jones industrial average and the Standard & Poor’s 500 index.
In addition, King noted, convertibles were hurt when the bonds of giant auto manufacturers General Motors (GM) and Ford Motor (F) were downgraded to junk status in May. Both are heavy issuers of convertible securities, he said.
Hedge fund activity also pressured convertibles early this year, according to Boesel and King. Managers of these funds began to give up on convertibles when returns from so-called convertible arbitrage began to shrink, King said. (The strategy involves holding a long position in a convertible security and a short position in its underlying stock.)