Focus on convertible bonds
Interview: Franklin Investment Securities Trust---Muschott, Alan---Fund Manager
>> welcome back. interesting moves in the last hour of trading today. let’s get to the closing numbers thon monday. we saw the dow jones industrial average up points on the day. the s&p 500 just clearing the 1,000 mark, as you can see, for the third time this year, up 5.7 points t nasdaq up over 20 points to 1,754 on the day. the nasdaq is the leading percentage gainer up 1.2%. nyse seeing volume of 1.4 million shares. at the nasdaq we see volume heavier, nearly 2 billion shares traded, 1.95. advancers beat declines by almost a two to one basis. moving on to the wilshire 5000, that index finished up on the day though the intraday chart shows selling action towards the end of the session, finishing up 7/10 of a percent. checking bonds, we see selling on both the long, also the short end of the curve as money moved from fixed income into the equities markets on the day. >> checking currencies, we see the dollar move down against the yen, but it moved up against the euro, although the move against the euro was fairly small, as you see there. the euro at $112.82. really an insignificant movement there in the euro. but nevertheless the move against the yen was more as the dollar fell, as you see, to .19 yen. the convertible securities market has done very well so far this year. our next guest runs a convertible securities fund which is up 21% year to date. the portfolio manager at franklyn investment securities trust fund and he joins us from san mateo, california. thanks for being on the program.
>> thank you.
>> so help us understand why it’s a good time to buy convertible securities.
>> well, convertibles really offer the best of both worlds to investors. plain vanilla convertible is a bond that gives you the opgs to convert into the common stock . if the common stock does well you have the opportunity to conthe into common stock and participate with the equity upside. on the other hand, if the common stock doesn’t do well, you stay as a bond and keep collecting your coupon. so you really have upside participation of common stock aknow with some downside protection as well.
>> now, besides just the idea that convertibles are a good type of security, give me more about your strategy of how you run your fund which is a convertibles fund? which kinds of convertibles are you most drawn to?
>> well, franklyn convertible securities fund we focus on what we call balanced convertibles. those are the convertibles that really have the favorable characteristics that i just described where they have equity participation on the upside and some downside protection. what we’ve seen in the market over the last couple of years with the selloff in the equity markets until recently, was that a lot of the securities became what we call busted, which means they had very little equity sensitivity, and they were very bond-like. in that type of situation we would tend to sell those securities and buy the ones that are more balanced. we also can run into situations where the underlying common stock does very well, and you get to the point where you have―the security has a great deal of equity participation, but it’s very little down side protection. so in that situation we would be selling those securities and again, redeploying the more balanced it is that really have the characteristics that investors are looking for in a convertible security.
>> so balanced in your vernacular means something like a 50/50 chance of having it make sense to convert into stock , something like that. if it’s absolutely sure are you going to keep it a bond, then you avoid that. if it’s something you are absolutely convinced it will become a stock , you’ll avoid that.
>> pretty much, yes. the way we like to look at it is we run kind of upside down side scenarios. we look at what happens if the underlying common stock moves, say, 25% up or down over a one-year period. we like to buy the convert iblgs that have―will participate in about 70, 75% of the upside, but only maybe 45, 50% in the downside.
>> one particular name that you mentioned was ford. tell us why you selected that.
>> well, ford fits that characteristic very well. we estimate from here that you would have about a 70% of the upside participation with about 40% of the downside participation. we like the common stock with ford, so we like the opportunity to convert into common because we think that ford is doing a good job turning around the company. the new f-150 series which is a very big deal for ford is being―the rollout is under way as far as production. it seems to be going without a glitch. and we think that the new 150 which is a real kind of bigger, stronger truck, is going to be something that really appeals to truck buyers. we also like the valuation of the common stock . then on the bonds side, the bonds are trading at a yield that’s higher than where we think they should be, so we think over time the yields come down, the value goes up, so you really benefit on both sides with the security.
>> one of the companies that has raised money through convertibles is charter. help us understand that security and what you think about it.
>> well, charter is a name that we have owned for a while, and it’s really―it was somewhat of a distressed situation at the beginning of the year. the company has really come back we believe in the fundamentals of the cable business. and in charter’s case they really need a financial reengineering. and a large part of that was just announced this week.
>> ok. we are running out of time. but i want to thank alan, portfolio manager for frank lins security trust.
