Convertible Securities: Capitalize on the Potential

Our Convertible Experience

Our experience in convertibles traces to the 1970s, when convertibles were little known. Over more than 30 years, we have amassed a depth of proprietary resources and experience.

  • Pioneer in the use of convertible securities to manage risk
  • $17.8 billion of assets under management in strategies that utilize convertible securities as of 12/31/14
  • Use convertible securities across an array of strategies to meet a range of investment needs

By utilizing the hybrid characteristics of convertibles in actively managed portfolios, we aim to produce asymmetric risk/reward profiles that capture upside and limit downside.

Upside Potential

When the underlying stock rises, convertibles may capture a portion of the capital appreciation

Downside Protection

If the underlying stock price drops, convertibles may provide consistent income and other fixed income characteristics (e.g., principal repayment)

Convertible Investments Can Provide Many Benefits

Actively managed convertibles offer the opportunity for Lower-Volatility Equity Participation - The fixed-income characteristics of convertibles may provide a floor during periods of equity market volatility.
  • CONVERTIBLES HISTORICALLY OFFERED EQUITY-LIKE RETURNS WITH LOWER VOLATILITY
    Over the 20-year period ended 12/31/2014, convertibles:
    • delivered equity-like returns
    • experienced lower volatility than equities
    RISK/REWARD STATISTICS: 20-YEAR
    STOCKS
    (S&P 500 INDEX)
    CONVERTIBLES
    (VXA0)
    Annualized return
    9.85%
    9.11%
    Standard deviation
    15.15%
    12.70%

    Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. There is no assurance the Fund will achieve or maintain its investment objective. Source: State Street Corporation and Mellon Analytical Solutions, LLC. Data from the 20-year period from 1/1/95 to 12/31/2014. Stocks are represented by the S&P 500 Index and convertible securities are represented by the BofA Merrill Lynch All U.S. Convertible Index (VXA0).

  • Reduced Vulnerability to Interest Rates - The equity characteristics of convertibles may help reduce interest rate sensitivity compared to Treasury bonds and broad fixed income indexes.
    In the past 20 years when the 10-year Treasury yield rose more than 100 basis points, convertible returns tended to more closely reflect equity returns than bond returns.
Source: Morningstar Direct and Bloomberg; most recent data as of 12/31/2014. Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. There is no assurance the Fund will achieve or maintain its investment objective. Rising rate environment periods from troughs to peak from October 1993 to December 2013.

Active Management is Essential

It is not simply the convertibles that make a strategy work, but how convertibles are managed to achieve a particular investment objective.

  • Often, convertibles are thought of as a single asset class, but convertibles do not have uniform characteristics—they can look fixed income-like, equity-like or hybrid in nature.
  • Structurally, the variety of risk/reward characteristics of convertibles allows them to support a range of asset allocation goals.
  • Our approach is to use different convertibles within specific investment strategies to allow clients to meet various risk/reward targets.
    Convertibles Benefit From Active Management
    Convertibles demand active management to identify the best total-return possibilities.
    • Convertible securities vary in their levels of equity- and fixed-income sensitivity.
    • Passive strategies cannot adjust to the changes in an individual convertible let alone the convertible universe as a whole.

Convertible-Related Strategies Designed for a Range of Investor Needs

Mutual Funds:

pursuing lower-volatility equity participation through use of convertibles

Closed-End Funds:

innovative, multi-asset class portfolios designed with a focus on competitive distributions

Institutional Strategies:

pursuing managed volatility through use of convertibles

UCITS:

convertible-based funds for investors outside the U.S.

Convertible Securities Risk: The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value.