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Minyan Mailbag: More Converts


Thanks Succ!


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Prof. Succo,

Several nice pieces on converts lately. I'm hard-pressed to disagree with your general assessment since I have been living the pain. The one thing I think overlooked through all of this is the outright convertible investment community. That is what we do. In a nutshell, we are stock pickers. We do bottoms-up fundamental equity research. We then combine that with quantitative analytics on individual convertible securities.

The average outright convertible fund is down 6.14%YTD according to Bloomberg. Our fund is down 4.07% YTD. Not stellar absolute performance, but when compared to the equity markets (Dow -5.08%, SPX -4.03%, Nasdaq -10.24%), well, converts look pretty good on a relative basis. Things look even more impressive on a risk adjusted basis.

However, the asset class is feeling a lot of pain, and I agree there is more to come. But let's not lose sight of the bigger picture. I think the numbers show that with the right manager, an outright convertible investment still makes sense. Perhaps more so today than in recent years!!

Minyan B


I have described the difference between convertible bond hedge funds and straight buyers such as yourself. The primary difference is time horizon, which incorporates risk tolerance.

"Arbitrage" as done by hedge funds has a much shorter time horizon and less tolerance for losses. Losses can cause the investor base to redeem.

Funds that buy convertibles for the fundamentals have a longer time horizon and more tolerance for losses. This environment may be a buying opportunity for such funds even though they know full well it may be some time with some losses before prices turn back up.

Prof. Succo

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