NEW YORK ( TheStreet) -- Edward Silverstein, manager of the MainStay Convertible Bond Fund (MCOAX), says Teva Pharmaceutical Industries' (TEVA - Get Report) cheap shares and strong cash flow makes its convertible bonds a strong bet.
The $717 million fund, which has earned four stars from
, has gained 45% during the past year, beating two-third of competing funds. The fund has gained 5.1% annually, on average, during the past five years, outpacing 96% of its Morningstar rivals.
Fund Manager Five Spot, where America's top mutual fund managers share their investing views in five fast and furious questions.
What is your outlook for the economy?
As spring follows winter, the economy will strengthen from its slump. The excessive leverage and speculation that caused the 2008 panic have diminished. Asset prices are returning to rational economic levels. Housing prices in the worst-hit real estate markets, such as Arizona, Las Vegas and inland California, have begun to rise. Other markets will follow suit once prices reach a level where it makes economic sense to own.
While employers continue to shed jobs, they are doing so at a decreasing rate. Existing employees are working an increasing number of hours and, in time, employers will substitute additional workers for overtime. U.S. gross domestic product has begun its expansion, as has consumer spending, albeit at a muted pace.
Why are convertibles a good way to play this market?
Convertible bonds inherently offer downside protection similar to some fixed-income investments and the upside participation related to stocks. Having appreciated over 60% since their March low point, stocks are vulnerable to selloffs despite positive economic underpinnings. Convertible bonds should hold up well relative to stocks during market selloffs.
Convertibles also provide investors with most of the stock market's rise should the upward trend of equities continue. During the past two decades, convertible bonds have outperformed stocks not only on a risk-adjusted basis, but on an absolute basis as well.
What are some of your favorite bond issues?
We like Teva Pharmaceutical's puttable bonds due February 2011 and
(CLB - Get Report)
bonds due October 2010. These bonds offer significant potential upside tied to the performance of the issuer's equity and a fair level of downside protection in the event of a stock decline. Teva bonds are rated investment grade and although Core Labs' bonds are unrated, the company has more cash than debt and likely would be investment grade if rated.