In the recent article, “Buying Convertible Bonds with Alan Muschott CFA,” LearnBonds interviewed the portfolio manager of the Franklin Convertible Securities Fund. For anyone interested in some insights into convertible bonds, I highly recommend reading the interview. As a supplement to the interview, I would like to provide a few investment options for those interested in adding portfolio exposure to convertible bonds. Despite the fact that I think financial markets are overextended at today’s prices, it is never a bad time to search for investment opportunities to add to your watch list for when the price is right.
Given Alan Muschott’s thoughtful interview, I would be remiss if I didn’t provide a few details on his fund. The Franklin Convertible Securities Fund by Franklin Templeton Investments is a nearly 26-year-old fund with just over $1 billion in net assets (across all share classes). As of January 31, 2013, 69% of the fund’s assets were in convertible bonds, and 26% were in convertible preferreds. The remaining funds were in cash. At that time, there were 63 positions in the fund, including companies from a variety of sectors. Five sectors had double-digit representation in the fund. The largest was Information Technology at 24.46%, followed by Health Care (15.42%), Consumer Discretionary (13.74%), Financials (10.02%), and Industrials (10.00%). Additionally, distributions from the fund are paid on a quarterly basis, historically in March, June, September, and December.
It is important to note that this fund has three share classes—Class A, Class Advisor, and Class C—and that the Class A shares carry an initial sales charge of up to 5.75%. The reason the sales charge is labeled a “Max Initial Sales Charge” rather than simply a “Sales Charge” can be found in the Summary Prospectus dated March 1, 2013. In that document, it states, “You may qualify for sales charge discounts in Class A if you and your family invest, or agree to invest in the future, at least $50,000 in Franklin Templeton funds.” Moreover, Class A shares also have a net expense ratio of 0.90%.
Class C shares, on the other hand, have no initial sales charge. But they do have a 1.65% net expense ratio and a 1.00% contingent deferred sales charge (CDSC) in the first year an investor owns the fund. According to the aforementioned Summary Prospectus, the 1.00% CDSC is calculated as a percentage of the lower of an investor’s original purchase price or the sales proceeds. Last, the Advisor shares carry no initial sales charge, no CDSC, and a 0.65% net expense ratio.
The tickers for each of the share classes are as follows: Class A is FISCX; Class Advisor is FCSZX; Class C is FROTX.
Beyond the Franklin Convertible Securities Fund, there are other funds you might consider as well. Well known firms such as Vanguard and Fidelity (among others) offer convertible securities funds. The Vanguard Convertible Securities Fund, ticker VCVSX, sports an expense ratio of just 0.59%, a minimum required investment of $3,000, and no sales charge. As of March 7, the fund’s SEC yield was 2.64%. In terms of the fund’s size, as of January 31, net assets totaled $1.7 billion. At that time, the fund held 189 bonds and 17 stocks, and had an average duration of 7.4 years. It is interesting to note that the most recently updated top 10 holdings for Vanguard and Franklin Templeton’s convertible securities funds show only two overlapping companies: Brookdale Senior Living and Cemex.
The Fidelity Convertible Securities Fund, ticker FCVSX, has a 0.76% expense ratio, a $2,500 minimum required investment ($500 for IRAs), and no sales charge. This fund has a bit over $1.8 billion in net assets (as of February 28) and has 86 holdings (as of December 31, 2012). The fund’s assets are highly concentrated among the top 10 holdings; those 10 make up 45.62% of assets. Interestingly, Fidelity’s Convertible Securities Fund shares no top 10 holdings with either Vanguard’s or Franklin Templeton’s equivalent funds.
If you tend to favor ETFs when searching for funds to buy, you may be interested in State Street Global Advisors’ SPDR Barclays Convertible Securities ETF, ticker CWB. This ETF, which has only been around since April 2009, has the lowest expense ratio (just 0.40%) of those mentioned in this article. It has a bit more than $1 billion in net assets, 98 holdings (as of March 7), and a 2.17% SEC yield (as of March 7). Also of interest is the fund’s maturity ladder: 62.86% of the fund matures in less than 5 years, and 25.26% matures in more than 20 years. The remaining securities have maturities between 5 and 20 years. In terms of credit quality, 33% of the fund has a non-investment grade rating, and 26.68% has no rating. Like the aforementioned Franklin Convertible Securities Fund, CWB’s largest sector allocation belongs to Technology at 29.66%. Last, as of March 7, the top 10 holdings made up 26.88% of the fund, and the top three alone made up nearly 12%. The top three holdings belong to Wells Fargo’s 12/31/2049 maturing, 7.5% coupon convertible; General Motors’ 12/31/2049 maturing, 4.75% coupon convertible; and Bank of America’s 12/31/2049 maturing, 7.25% coupon convertible.
Should you favor investing in individual securities rather than funds, you can find plenty of individual convertibles to examine by going to the holdings pages of various convertible securities funds. One thing worth noting about investing in individual convertible bonds: If you search for those bonds on your retail broker’s platform, there is a good chance that your search will return no results. That, however, does not necessarily mean there is no market available for those bonds or that you can’t purchase those bonds. If your search returns no bonds, call you broker and ask the representative to check the secondary market for offers. Even though bonds may not be advertised on your retail broker’s platform, there are still often offers to be found in the secondary market (ask your broker to check on Bloomberg). Sometimes you just have to know to ask.
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