This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

3 Convertibles Funds Offer Smooth Rides

NEW YORK (TheStreet) -- In recent years, convertibles funds have delivered compelling returns. During the past decade, the funds returned 6% annually, outdoing the S&P 500 by 2 percentage points while taking much less risk, according to Morningstar. Can convertibles continue outpacing stocks? Maybe not. But convertibles are worth considering because they can diversify portfolios.

Convertibles are bond-like securities that can be converted to stocks. Yields on the securities currently range from about 2% to 5%. The yields cushion performance in downturns. As a result, convertibles outdid the S&P 500 during the market collapses that occurred after the Internet bubble burst in 2000 and in the financial crisis of 2008.

Convertibles come with a variety of different characteristics. At one end of the spectrum are volatile securities that track stocks closely. At the other extreme are bond-like securities that rise and fall with fixed-income markets. Many top-performing funds favor balanced convertibles, which fall in the middle of the range and have characteristics of both bonds and stocks. Balanced securities tend to avoid big losses in downturns and record decent gains in bull markets.

7 Companies That Keep on Growing

For a solid fund that focuses on balanced securities, consider Franklin Convertible Securities (FISCX), which returned 6.9% annually during the past 10 years, outdoing 86% of peers. Franklin portfolio manager Alan Muschott looks for convertibles that would only lose half as much as stocks in downturns and deliver 75% of the gains in rallies. Muschott avoids convertibles that track equities too closely. Such securities can excel in rallies, but they can also suffer steep losses in downturns. "We prefer the balanced securities because they have favorable characteristics on the upside and the downside," he says.

Muschott said that the characteristics of convertibles can change. Sometimes a balanced convertible can begin to act more like equities. When that happens, Muschott sells. To appreciate why his strategy can work, consider that in a typical deal an investor might pay $12,000 for a security that can be converted into stock worth only $10,000 today. The premium is justified because convertibles can pay off under a variety of scenarios. If the stock skyrockets, an investor can convert the security to common shares and record a nice gain. If the stock goes nowhere, the investor still collects fixed yields, which are typically higher than stock dividends.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $126.41 0.00%
FB $81.21 0.00%
GOOG $575.33 0.00%
TSLA $200.63 0.00%
YHOO $44.16 0.00%

Markets

DOW 18,135.72 +38.82 0.21%
S&P 500 2,101.04 +2.51 0.12%
NASDAQ 4,982.8090 +15.6680 0.32%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs