Convertible bonds proving better value in bear market. (Wall Street West).IT was a long time coming, but investors in convertible bonds are finally being rewarded - at least in a relative sense - for taking stakes in bonds that pay interest, but which are also exchangeable for stock, under certain conditions. From 1975 to 1995, so-called converts held their own as an investment choice against the S&P 500 Index--a broad gauge broad gauge n. 1. A distance between the rails of a railroad track that is greater than the standard width of 56 1/2 inches (143.5 centimeters). 2. A locomotive, car, or railway line of this gauge. of blue chip stocks--but faded for the next five years. In the bear market, however, converts have caught up as the interest payments they contain protected their value. An investor putting $100 into either stocks or converts in 1975 would have received $1,300 by 1995, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Los Angeles-based Froley Revy Investment Co., one of the nation's leading convertible bond money management shops. The next five years were beautiful for straight stock investors. That $100 from 1975 grew to more than $5,000 by 2000. Meanwhile, total returns on converts rose more modestly, to less than $4,000, based upon the Froley Revy Convertible Bond Index. But in the last couple of years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time S&P total fell back to $3,500. Converts, whose values tend to track stock prices if they're near their conversion price but will otherwise trade more like bonds, fell much less. The original $100 in 1975 is worth about $3,500 in converts as well. According to efficient market theory, it's nearly impossible to outperform Outperform An analyst recommendation meaning a stock is expected to do slightly better than the market return. Notes: Exact definitions vary by brokerage, but in general this rating is better than neutral and worse than buy or strong buy. securities markets over time, whether it's with one class of assets or many. Nearly all investment styles or tactics appear to "regress REGRESS. Returning; going back opposed to ingress. (q.v.) to the norm," or overall market return averages. That said, there are pitfalls a-plenty for investors, largely due to accounting issues. What especially worries bond investors is pension obligations, according to George Froley, chairman who founded Froley Revy in 1975. "General Motors has pension obligations to current and future retirees that are roughly three times the company's market cap," said Froley research analyst David Epstein For the computer scientist notable for his work in computational geometry, graph algorithms, and recreational mathematics, see David Eppstein David B. A. Epstein (b. in a recent newsletter. If the stock market goes sideways, these pension obligations become harder to fulfill. Contributing columnist Benjamin Mark Cole Mark Cole is a multi-instrumentalist blues and roots musician based in Gloucester, UK Music Mark primarily writes and performs blues music but also writes and performs music influenced by other American roots music genres such as americana, cajun, zydeco, bluegrass and writes about the local investment community. He can be reached at sevencontinents@mindspring.com. |
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