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Convertible funds soar
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December 3, 1999: 4:36 p.m. ET
Manager uses bonds that can convert to stocks to deliver top long-term returns
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Fund manager John Calamos is something of a shadow-dancer on Wall Street who likes to say he is long-term bullish, short-term scared.
Calamos, of Calamos Growth & Income Fund and Calamos Convertible Fund, says his strategy of investing in bonds that can convert into stocks allows him to ride the bull market but avoid a big fall. The bonds "shadow” the rising stocks without as much risk.
"In a rising market, convertible bonds will increase in value nearly as much as the underlying stock,” Calamos said. "But in a falling market, it’s almost like a shock absorber on the downside.”
The Growth & Income Fund is up 32.72 percent year to date as of Thursday, while the Convertible Fund is up 20.94 percent in the same time, he said. Growth & Income is ranked first in five-year returns tracked by Morningstar as of Oct. 31 in a category of 57 funds, while the Convertible Fund is ranked fifth.
A brain teaser
Calamos is used to blank stares when he talks about convertible bonds. Even professional money managers have a tough time figuring them out, he said. (People who want to understand more can read his book, "Convertible Securities: The latest instruments, Portfolio Strategies, and Valuation Analysis”).
Simply put, let’s say you buy a bond for $1,000 that matures in five years and pays interest of 4 percent. The stock is trading at $20. Since each bond is worth 40 shares of stock, the equity value of the bond would be worth $800. So you wouldn’t convert, because you’d lose $200 on your investment of $1,000.
But if the stock rises to $40, that means the bond is now worth $1,600, so you’re up 60 percent. In a worst-case scenario if the stock plunges, you don’t convert the bond and in five years you get the $1,000 and the 4 percent interest for each year.
The bottom line is if the stock goes up, the convertible bond will increase 80 percent, Calamos said. If the stock price falls 50 percent, the bond will only give up about 20 percent.
You don’t have to convert the bond unless you want to or if the company decides it wants to retire the debt.
"It’s a way to own the stock in a less volatile way,” Calamos said.
Some favorites
The top holding in both funds is a convertible bond for Qualcomm (QCOM). Qualcomm has risen roughly 1,200 percent this year and the convertible bonds are up about the same. The returns are nearly identical because the stock has soared so much. The higher the convertible bond goes, the more like a stock it becomes.
Sometimes a company will force a conversion to get out of debt or avoid paying that interest rate. For example, the funds have invested in different issues of Home Depot (HD) since 1988. Last month, Home Depot forced a conversion on a bond that was up 240 percent.
"We convert when we’re forced to,” Calamos said.
Then again, Calamos doesn’t let his winners ride forever, which is why the two funds lose ground against their peers in year-to-date returns. For example, Growth & Income fund is ranked 12th out of 57, while the Convertible fund is 28th in that time as of Oct. 31, Morningstar said.
"We differ from the peer group because we want downside protection,” Calamos said.
Some other top performers year to date include Gabelli Global Convertible Securities Fund, up 40.2 percent as of Nov. 30; and Ariston Convertible Securities Fund, up 50.1 percent in the same time, Morningstar said.
The Calamos Growth & Income Fund, with $35 million in assets, is the riskier of the two funds because it can invest in bonds that are below investment grade, Calamos said. Calamos Convertible fund has about $150 million in assets.
A winning strategy
Calamos is a veteran in convertible bonds, and he’s been trading them since the 1970s. He founded Calamos Asset Management in 1977 and manages institutional assets of about $4 billion. He got into the fund business in the mid 1980s.
"I started in 1970 when the Dow was at 1,000,” Calamos said. For the next 12 years, convertible bonds were the best-performing asset class, through the recession of 1974 and the double-digit interest rates of the early 1980s when the bond market was in a funk.
And this year, many institutional investors are looking at convertible bonds as a good alternative in fixed income because the bond market has been performing so poorly, Calamos said.
"We are going to continue to be in a very volatile market,” Calamos said. "We have a strategy to control that volatility.”
Wall Street had a great week, with the three major indexes hitting new record highs. Here are some winners for the week in technology stocks tracked by Lipper Analytical Services.
At the top of the list is: Turner Technology Fund, institutional shares, up 6.43 percent for the week. The year to date figure isn’t available. Homestate Year 2000 Fund is second on the list, up 5.36 percent for the week Nov. 24 through Dec. 2 and up 120.70 percent year to date; followed by First American Technology Fund, class Y, up 4.40 percent for the week and up 148.87 percent year to date.
The three losers for the week are Guinness Flight Internet Fund, class R shares, which broke even for the week. The year to date figure isn’t available. AIM Global Telecommunications and Technology Fund, adviser shares, was next, off 0.12 percent for the week but up 71.67 percent year to date; followed by Red Oak Technology Select Fund, down 0.14 percent for the week but up 106.80 percent year to date. 
-- Staff Writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments about mutual funds you can contact her at mailto:cnnfn.interact@turner.com
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