Convertibles: Know When to Fold 'Em
This column was originally published on RealMoney. It's being republished as a bonus for TheStreet.com readers.
Knowing when and how to sell might be the most difficult part of managing a portfolio.
Earlier this week, I began to unwind a position in the Calamos Convertible Opportunities and Income Fund (CHI). I have owned the fund for clients since shortly after its IPO in early 2003.
Convertible bonds convert into common stock at a particular price. Usually these bonds are issued with a conversion price much higher than that of the underlying common stock. In a few years, if the stock moves higher, holders might convert their bonds into common stock. A big draw is that as the stock moves higher in price, so does the bond, but if the stock trades lower, the convert trades more like a bond. Buyers need to do their homework with individual issues.In fact, buying individual issues is very difficult for do-it-yourself investors and a lot of portfolio managers. If a manager can get access to a great bond offering from the Acme Anvil Company, he can buy what he needs for clients, but as new clients come on board, he may have a tough time buying more or finding a suitable substitute. Another problem for individual investors in convertible bonds is selling them. A brokerage is likely to give a very low bid for $25,000 or even $50,000 worth of a bond. This is because the firm may not be able to sell it quickly to someone else. This is where a closed-end fund such as Calamos Convertible Opportunities can come in handy. Calamos is just about the best fund manager in the business for convertible bonds. A lot of attention is paid to the premium or discount to net asset value of closed-end funds. While this is important, I think that big changes in the premium or discount are more important. Calamos Convertible has traded at a large premium to NAV for a long time, and investors haven't really been hurt by paying it. The premium has held steady, and the fund has yielded 8% to 9% while I have held it.
|Calamos Convertible Opportunities & Income Fund|
|Click here for larger image.|
|Source: Calamos Financial Services|
|Calamos vs. 10-Year Treasury Yield Index|
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