Dear Mr. Berko: Please tell me what a convertible bond is and why so few brokers recommend convertible bonds. I’d like to invest a portion of my portfolio in convertible bonds but don’t know where to find research on these strange securities. What do you think of Value Line convertible research? Do you have any suggestions for me?
— LK, Oklahoma City
Dear LK: The first mention of convertible security in history dates back to imperial Rome. Regulus Cheatus owned the largest toga company in Rome. Its popular shares traded at 3 siliques on the Roman Pantheon Exchange. Regulus needed additional capital to market a double-breasted toga, and Bankus Takeus was offering to lend 1,000 talents (a lot of money) at 5 percent interest for 20 years. Regulus said that was too high and wanted Bankus to charge 3 percent. However, to compensate for the lower rate, Bankus would be allowed to purchase 1,000 Toga shares at 4 siliques anytime during the next 20 years and would also get its 1,000 talents back at maturity.
Some say a convertible security offers the best of both worlds — the income and safety of a bond plus the appreciation potential of a common stock. However, during the past 10 years, these investments haven’t set the world on fire. And most big-name convertible funds (Putnam, Pimco, MainStay, Lord Abbett and Columbia) barely have earned 6 percent total returns in the past decade. Though, Fidelity’s convertible fund posted a 7.46 percent average 10-year total return, and I could live with that.
Some of the best convertible research derives from Barclays and Credit Suisse. They’ve published dozens of recommendations that over the past decade have had outstanding results. Their research is thorough and clear. Merrill Lynch and Morgan Stanley have convertible bond researchers who are worth their weight in diamonds. Their narratives and conclusions tend to be too technical for my tastes, but the proof is in the pudding — and their pudding has been tasty. Value Line also has a convertible bond research department. Its recommendations are not widely respected by the industry and have few followers. I suspect that the Value Line staff is mostly composed of pubescent kids in short pants riding trikes with training wheels and hoping for an invitation to the big leagues. Value Line doesn’t publish publicly, so I’ve never seen any of its recommendations. I know of no praise for its work, so I suspect that the Value Line dudes are duds. But their reports on common stocks are well-composed and above average for content and clarity.