(FORTUNE Magazine) – Trying to gird against risk without forgoing big gains is like trying to do the impossible. Stanford Rothschild, 60, president of Baltimore's Rothschild Co., which manages $900 million for corporate profit-sharing plans and wealthy individuals, has resolved the dilemma by investing almost half his clients' money in convertible securities. Over the past 13 years, on average, his clients have enjoyed a compound total return of 15.8% a year, counting reinvested dividends; that beat the return on Standard & Poor's 400-stock index by better than four percentage points. In a recent interview with FORTUNE's Andrew Serwer, Rothschild, no kin of the famed banking family, discoursed on some of the convertible and other securities with which he hopes to continue his balancing act. Excerpts: What do you look for in a convertible? We like fundamentally sound companies whose securities offer a superior interest rate, the safety of a sinking fund to retire the debt, and protection in case the debt is called in early. We also look for convertibles with unusual features, such as a put that gives us the right to turn them in at face value. That gives you capital protection, assuming the company's credit is good. In a bull market, these securities generally do not rise as fast as the common stock into which they can be converted at a predetermined price per share. But you get a high front-end yield as well as protection in a down cycle. How will the tax reform law affect convertibles? When the tax rates on capital gains and income become the same, as provided in the bill agreed to by Senate and House conferees, the bird-in-the-hand income provided by convertibles will look more attractive. What's one of your favorite issues? We hold the 7 1/4% convertible bonds of Forest City Enterprises, currently selling a bit over par to yield 7%. The company, based in Cleveland, is in the cyclical building and building-supply business. It's also a property owner and developer. The whole real estate business deserves a reevaluation because of the new tax bill. But tax reform will mainly hurt companies that, unlike Forest City, are structured primarily as tax shelters. The advantage of owning the company's convertibles, instead of the common stock, is that we don't have to worry about ups and downs in the building business. Any others? Beverly Enterprises, the country's largest owner and operator of nursing homes, has a very interesting zero-coupon bond called a liquid yield option note, or LYON. These are convertible zero-coupon bonds with a recurring put feature. Beverly has taken on a large debt load because it must grow in a capitalintensive business, yet it faces an uncertain rate of return because of government regulation. The LYONs are priced at around 28% of their $1,000 face value and mature in 2003; they come at such a deep discount because they pay no interest. Each LYON is convertible into 13.3 shares of common. But with the stock recently selling at $18.50 a share, you would effectively be paying $21 a share if you bought the bond and converted now. We believe the stock will go up and make conversion worthwhile. But even if the stock goes nowhere, after September 1988 the company will allow you to turn in the zeros at the original selling price plus compound interest. This issue is so complicated that only sophisticated investors are buyers. Your fondness for convertibles extends even to the oil business. We own preference units of the Mesa Master Limited Partnership Trust, set up last year by T. Boone Pickens to replace Mesa Petroleum Co.'s corporate structure. The preference units trade on the Big Board for around $12.50, pay out $1.50 per year, and at the end of five years will be converted into Mesa Limited Partnership units. The preference unit payment is like the dividend on preferred stock -- it must be paid before the limited partners get anything. The regular units currently pay more, but the oil and gas business looks fairly risky for the next few years and cash distributions to holders of the regular units could drop. With the preference units you would still be safe with $1.50 a year, or a yield of 12%, which in an oil and gas limited partnership is treated as a tax-free return of capital. Boone Pickens may be controversial but he is also very inventive. What about plain old common stocks? Do any look good? National Education, a company that provides vocational training and retraining of people displaced from many mature industries, looks very timely. With schools located in major metropolitan areas all over the country, National Education teaches skills in all the growing service industries, including computer operation. It's a growth company, without a downturn in earnings in the past ten years. Last year it earned 85 cents a share, and even + though it made a large acquisition this year, I expect earnings to pass $1. Have you found companies that will benefit from tax reform? The new bill takes away many tax breaks for investors. But it leaves untouched most life insurance products, including variable annuities, whose return depends on the performance of invested premiums. A company we like, which is already a leader in this area, is Monarch Capital of Springfield, Massachusetts. With variable life you will still be able to defer taxes on dividends and capital gains until maturity. I also like the fact that many of Monarch's products are being sold by Merrill Lynch. With all the good news, why hasn't the stock run up? It did have a run up to $79 a share, where it got ahead of itself. Now it's back in the mid-60s, which I find attractive.Personal Investing