NEW YORK ( TheStreet) -- Investors concerned about the possible end to the bull market may want to opt for convertible bonds, says Edward Silverstein, manager of the MainStay Convertible Fund (MCCVX). His favorite issues include Apache (APA) and AMR (AMR).
The $1 billion mutual fund has returned 25% in the past year, according to Morningstar (MORN). During the past five years, the fund has risen an average of 6.6%, better than two-thirds of its peers.
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Why is now a good time for convertible bonds?Silverstein: If you think about where stocks are right now, there is a lot of concern in the equity markets about corporate earnings and the general economy going forward. If stocks have not peaked, then converts will participate in the majority of the upside of the future stock market rise. And if we have peaked, then converts will protect you nicely on the downside. In terms of interest rates, converts are actually negatively correlated to Treasuries and will do very well in a rising interest rate environment. Why do I want to own Apache converts as opposed to the straight debt? Silverstein: The straight debt would not participate in the upside of the company's common stock. We think the company's common stock is undervalued, particularly after what happened in Egypt. Nearly 20% of Apache's assets are in Egypt, and we think it's highly unlikely those assets get expropriated. We are bullish about energy prices as well. Usually when oil goes up, airline securities go down. So why do you want to own both Apache and AMR in your portfolio? Silverstein: Oil has gone up and so AMR's common stock price has come down. We think it's a good entry point into the convert where you will participate in a significant amount of the common stock movement on the upside. You are also getting paid about 6% to wait while you own it, and we think the downside is pretty well-protected. And in the event that the stock gets anywhere near its previous high of $40 a share, then the converts will more than double from where they are now. Along those same lines, EMC (EMC) recently received a very favorable write-up in Barron's, so why do I want to own the convert instead of the common? Silverstein: The yield on the company's convert is better than the common. You will pick up almost 100% of the upside of the company's common stock. And at the same time, if some catastrophe should befall the company, then the convert will protect you better on the downside.
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