FRANKLIN CONVERTIBLE SECURITIES FUND
If there is an asset class that continually gets overlooked and really ought not to it's convertible securities. Convertibles, which are a snap to understand when you're thinking "car" rather than "investment", offer investors a taste of two worlds--- stocks and bonds.
"In their most basis form, convertible securities are either bonds or preferred stocks that are convertible into the underlying common stocks," says Edward Perks, portfolio manager of the Franklin Convertible Securities Fund 800-342-5236. "The attractiveness of the asset class is, over the long-term, it has proven to deliver returns that approach that of the S & P 500 with significantly lower risks."
Performance numbers from Ibbotson Associates, a Chicago-based securities research firm, make his point. They show that from 1973 through 1999, the compound annual return of the S & P 500 was 13.9 percent; for convertibles it was 12.6 percent; and on long-term corporate bonds, 8.84 percent.
"Standard deviation, which is the risk or the volatility, was 16.7 percent (for the S & P 500), 12.4 percent on convertibles and 12.1 percent on long-term corporates," says Perks whose fund was ranked the #1 performing convertible in 2000 by Lipper, Inc. "So you can see a significant drop in volatility ( between the S & P and convertibles) without the same kind of drop in return."
Since Perks became manager of the fund in December of 1998, he's changed the way it was managed. In addition to bottoms-up research he looks for balanced convertibles to invest in, i.e., those that offer both income and equity return opportunities.
Currently, there are 53 securities held in the Franklin Convertible Securities Fund, with the portfolio split fairly equally between convertible bonds and convertible preferred stocks. Here's more from Perks:
Q: How often are convertibles converted to common stock?
Perks: Typically, you would not convert because by doing so you are actually accelerating the maturity of the option.
A convertible is really just a bond with an option , or a preferred stock with an option giving investors the opportunity to participate in the upside potential of the common stock. If we receive the common stock in exchange for our convertible, then it is our goal to sell that stock position and reinvest the process in another convertible.
Q: Last year the fund was the top performer in its category. How'd you do that?
Perks: I attribute our performance last year to a function of the strategy we have in place---creating a portfolio of balanced convertibles.
Q: What does that mean?
Perks: If you think of the kind of range that convertibles can have---they can be very bond-like and have equity upside at all or very equity-like with no income--- our fund is right in the middle. Balanced and having convertibles in the portfolio that offer both.
What we are trying to do is create a portfolio of convertible securities that deliver more of the upside, less of the downside and still offer attractive current income. Now not every security that we own does that, but we want the whole of the portfolio to reflect that.
Q: Can you give me an example of one of the fund's holdings and why it's an attractive convertible?
Perks: Newfield Exploration. It's an oil and gas and exploration mostly in the U.S. and they are starting to explore in Australia among other places.
In order for us to want to invest in a convertible security we have to understand the fundamentals of the company and have a view that the stock is an attractive value and will be able to grow and appreciate. Secondarily, if that happens for the stock, will the convertible security benefit and treat us the way we want to be treated. Newfield comes out as one that does.
Q: Any advice that you'd give the newcomer to convertible securities?
Perks: Make sure that they understand the convertibles in the fund they've chosen. And, the fund manager's investment strategy because there is so much diversity within the convertible market.
If, for instance, I wanted to create a convertible portfolio that acted very much like the underlying portfolio of its stocks, I could do so. Similarly, if I wanted to create a portfolio of convertibles that was more bond-like with very little equity sensitively, I could do that too because within the convertible universe there is that diversity.
Franklin Convertible Securities Fund
|TOP HOLDINGS||Affiliated Computer Services, Cox Communications, Weatherford International, Charter Communications and Newfield.|
|PERFORMANCE||Through Jan. 31, the fund was up 7.2 percent. As of December 31, 2000, it was up 15.36 percent, and in 1999, ahead 44.08 percent.|
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