Dec 20, 2008 @ 04:12 pm
"This level of undervaluation represents what we believe is a very rare opportunity—one we have never witnessed in more than 30 years of managing convertible portfolios."
That's what Nick Calamos recently said about convertible bonds.
And who better to know we're looking at "a very rare opportunity" in convertible bonds?
Calamos is Co Chief Investment Officer of Calamos Investments which manages about $23.8 billion in assets with a big chunk of them in convertible bonds. The New York Times calls Calamos "one of the most sought-after fund managers in the country…after developing an expertise in convertible bonds."
Calamos clearly knows what he's talking about when it comes to convertibles - little-known, exotic securities which offer high levels of current income like bonds but offer all the capital appreciation of stocks.
The Financial Times sums the current opportunity up best, "Viewed as an asset class halfway between an equity and a bond on the risk scale, convertible bonds are now considered to be undervalued by many investors."
Best of Both Worlds
Convertibles offer investors a lot. A convertible is usually a bond or preferred share which is "convertible" into shares of common stock. For instance, if you bought a convertible bond, you would receive all the interest, get everything normally accorded to bondholders, but you would also participate in any rise in the value of the company's stock. If the shares rise above a predetermined point, you convert the bond into the shares and take the profit. If they don't you just take the interest and wait for the bond to mature.
It's the elusive win/win for investors. Convertibles are the closest thing to a perfect investment I've ever found and we've been covering them here in the Prosperity Dispatch for a long time.
I'm not alone here though. The right unique features of convertibles attracts some of the biggest and smartest money on the planet. Warren Buffett, sovereign wealth funds, and dozens of others all are buying up convertibles right now. Here's why.
Thanks in large part to the financial crisis and overwhelming aversion to take on any risk at all, convertibles are cheaper than they've been in decades (see chart below from October's Calamos Market Outlook).
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