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Convertible Funds Offer Yield And Sometimes More

During times of market uncertainty, convertible funds can make sense. Not only do they typically provide attractive income, but the equity-sensitive ones give investors an additional boost: upside potential.

When investors think about convertible securities, many just think about bonds. But preferred convertible stocks can be pretty sweet deals too, because they give a fund some upside equity potential not found in straight convertible bond funds.

Take the Rockhaven Premier Dividend Fund, (800-522-3508), for example. Nearly half of its portfolio is made up of a combination of preferred stocks, (12 percent), and mandatory preferred stocks (37 percent). As a result, the fund will have some stock-market-like characteristics that, hopefully, will allow it to outshine the market's performance during good years and allow it not to fall not quite as far during down markets.

A look at the fund's performance this year and in its recent past tells that story clearly: Through Nov. 2, the Rockhaven Premier Dividend Fund symbol RAMCX, was down 14.25 percent, while the S & P 500 was off 17.65 percent, according to Morningstar. At year end 2000, the fund was up 3.3 percent, while the S & P 500 was down 12.5 percent. And at year-end 1999, the fund was ahead 52.1 percent and the index up 31.1 percent.

Chris Wiles is portfolio manager of fund and has been at its helm since it began in Nov. 1997. Convertible securities are something that have been near and dear to his heart since graduate school, and he considers them a fascinating sub-segment of the market place.

Here's more from Wiles about convertible securities and the Rockhaven Premier Dividend Fund:

Q: Tell me a little about convertibles.

Wiles: There are convertible preferreds (stocks) and convertible bonds. And there is very little difference between the two, except for where they fall within the capital structure of a corporation.

The first convertibles were issued in the late 1800s by railroad companies that were rapidly expanding westward. Convertibles have predominately filled a niche in which you have a young, fast growing company that needs to raise capital and can't get the money they need to grow from their friendly neighborhood banker, or they find the high yield bond market too expensive. Or they choose not to do an initial public offering (IPO).

So, historically, it's the growthier segments of the market place that have been the biggest issuers of convertibles. In the late 1990s, it was tech and telecom, and now we're seeing a lot of health care, biotechnology, drugs, generic drug companies, etc., issuing converts.

Q: What about the fund?

Wiles: We keep about 40 securities in the fund, stay fully invested and run sector neutral to the Merrill Lynch Convertible Index---that's the broadest convertible index out there. ( Sector neutral means that the fund will hold the same sector weightings in its portfolio as are in the index.)

Where we place our bets is on picking names. You know, picking the most attractive underlying equities. We believe that if the equity doesn't work, the convert isn't going to work. So if you get the equity story wrong, you're not going to make the money you thought you were going to make on the convert.

Q: What's the most misunderstood about equity convertibles?

Wiles: Probably that people underestimate the upside potential and the total return potential on the securities.

Q: Who is the Rockhaven Premier Dividend Fund best suited for?

Wiles: Anybody who is looking for equity exposure and yield.

We try to play in what we call the "sweet spot." That's the total return part of the convertible market, and this fund is designed to give investors anywhere from 70-75 percent of the market's upside and then protect them somewhat on the downside too.

But people should not buy this fund if they think they are buying a defensive bond fund. That's not who it is targeted for. It's really targeted for equity investors who want total return. Another place were we've found it to be very useful is with foundations, endowments or any entity that needs to pay out income but also has long-term growth considerations.

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