As wealth managers seek predictable returns and ways to preserve capital in times of uncertainty, some may want to look beyond asset allocation and modern portfolio theory and consider convertibles.
At the Morningstar Investor Conference in Chicago on Thursday, June 24, fund manager and author John Calamos described the low-volatility investment strategies he uses. He compared the investing environment today to the one in the 1970s, when he began investing in convertibles.
Calamos, who said convertibles “do well in volatile sideways markets” like this one, cited legendary investor Warren Buffett as one who often uses a convertible structure in his own investing, calling it a “warrants and preferred stock equal convertible structure.”
The chairman, CEO, and co-chief investment officer of Calamos Asset Management, which he founded in 1977, Calamos has written two books on convertibles strategies, quipping at the conference that they are “the kind of book, once you put down you can’t pick up.” They are Investing in Convertible Securities: Your Complete Guide to the Risks and Rewards (Longman Financial Service, August 1988) and Convertible Securities: The Latest Instruments, Portfolio Strategies, and Valuation Analysis (McGraw-Hill; 2nd edition, June 1998).
A convertible is a bond that is usually subordinated debt of a public company, with a coupon and maturity date. When the company’s underlying stock hits a conversion price, the bondholder can opt to convert the bond for equity in the company.
For companies, Calamos said, a convertible “lowers the cost of debt,” as well as the “cost of equity.” Financing with convertibles can shave 2% to 3% off of the interest costs to a company for a regular corporate bond.