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Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
Using Convertible Bonds to Protect Portfolios and Increase Income
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Using Convertible Bonds to Protect Portfolios and Increase Income

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Convertible bonds offer a way to enhance a traditional fixed income strategy or the potential to reduce exposure to volatile equity markets. Such a strategy can be used by investors of all risk …

Convertible bonds offer a way to enhance a traditional fixed income strategy or the potential to reduce exposure to volatile equity markets. Such a strategy can be used by investors of all risk profiles and is an ideal supplement for a core principal protected equity strategy for retirement income.

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  1. Plan Well. Invest Smart. Live Better 12 Amidon Avenue, Amesbury, MA 01913 | (978) 388-0020 Protecting Your Portfolio and Increasing Income Through Steve Stanganelli, MSF, CFP®, CRPC® Principal Convertible Bonds Steve@ClearViewWealthAdvisors.com Using Convertibles to Preserve and Grow WealthClear View Wealth Advisors, LLC www.ClearViewWealthAdvisors.com
  2. Principal of the Firm Steve Stanganelli, MSF, CFP®, CRPC® – Over 20 years experience advising individuals© Clear View Wealth Advisors, LLC. 2010 2
  3. Clear View Wealth Advisors: The Firm Who is Clear View Wealth Advisors, LLC? •Clear View Wealth Advisors, LLC is a Massachusetts-registered investment advisory firm serving individuals, couples and business enterprises with comprehensive planning and investment services. •Established in 2010 •Number of Professionals: 1 (over 20 years experience) •Located: Amesbury and Wilmington, Massachusetts •Primary Goal: To protect client wealth through proactive and ongoing planning combined with risk-controlled investing. •Investment Strategy: Clients win by not losing. A multi-bucket approach is used combining strategic and tactical asset allocation. The long-term bucket is focused on an absolute return strategy that includes the use of convertible bonds.© Clear View Wealth Advisors, LLC. 2010 3
  4. Sub-Adviser Managing the Limited Risk Investment Program Wellesley Investment Advisors, Inc. •Wellesley is an SEC-registered investment advisory firm serving institutions, RIA’s, and other investment advisors. •Established in 1991 •Number of Professionals: 17 •Assets Under Management: Over $475 million •Located: Wellesley, Massachusetts •Primary Goal: To preserve capital and generate positive returns in all market environments. •Investment Strategy: Absolute return strategy deploying the use of convertible bonds.© Clear View Wealth Advisors, LLC. 2010 4
  5. Clear View Wealth Advisors, LLC Convertibles as an Asset Class© Clear View Wealth Advisors, LLC. 2010 5
  6. Beating Equities Over a Longer Period Cumulative Total Returns 12/73 – 6/10 Source: BofA Merrill Lynch Convertible Research 6/30/10 An asset class that has been utilized for over 150 years© Clear View Wealth Advisors, LLC. 2010 6
  7. Convertibles as an Asset Class Convertibles have the characteristics of three asset classes: 1. Bonds 2. Equities 3. Options© Clear View Wealth Advisors, LLC. 2010 7
  8. Convertibles as an Asset Class Get Paid While You Wait  Convertible bonds combine the stated repayment dates and yields of bonds and the upside potential of stocks.  Convertible bonds offer investors the potential to get paid with interest during market corrections or bear markets while they wait for the next market recovery or bull stock market.© Clear View Wealth Advisors, LLC. 2010 8
  9. Convertibles as an Asset Class Convertible Bond Advantages: a) Yield advantage over equities b) Capital appreciation potential c) Low correlations with stocks and bonds which enhances diversification d) History of strong risk-adjusted returns e) Track record of capital preservation f) Unlike other types of bonds, convertible bonds have generally performed well during periods of rising interest rates g) Convertible bonds have generally performed well in inflationary periods© Clear View Wealth Advisors, LLC. 2010 9
  10. Convertible Correlation With Other Markets Barclays S&P 500 TR Agg Bond BofA ML Wellesley Index Index V0A0 Index Wellesley 1 S&P 500 TR Index 0.52 1 Barclays Agg Bond Index 0.04 0.01 1 BofA ML V0A0 Index 0.78 0.67 0.01 1Source: Morningstar, Inc. 10
  11. Convertibles as an Asset ClassWho Should Invest in Convertible Bonds? a) Bond holders seeking less exposure to Treasury bonds, municipal bonds or ‘straight’ corporate bonds with greater potential upside b) Investors wanting reduced equity exposure without giving up stock market upside c) Investors looking for a non-correlated asset class for more diversification d) Investors fearful of rising interest rates on ‘straight’ fixed income products 11
  12. Historical Bear Markets: DJIA Year Number of Bear Markets Percent Decline 1900s 3 46%, 49%, 27% 1910s 3 24%, 40%, 47% 1920s 1 89% 1930s 3 23%, 49%, 41% 1940s 1 24% 1950s 1 19%, S&P 500 fell 22% 1960s 3 27%, 26%, 36% 1970s 2 45%, 27% 1980s 2 24%, 36% 1990s 1 21% 2000s 2 38%, 53%All numbers are approximate.All percent declines are declines in the Dow Jones Industrial Average. 12
  13. The Wellesley Approach to Convertibles Returns needed to breakeven after loss:© Clear View Wealth Advisors, LLC. 2010 13
  14. Wellesley’s Three Rules Rule #1 Capital Preservation is Primary Goal Rule #2 Invest for Absolute Returns Not Relative Returns Rule #3 Invest with a Time Horizon Through Complete Market Cycles© Clear View Wealth Advisors, LLC. 2010 14
  15. Home Run Example: Home Depot Historical Example: Home Depot What Happens When the Stock Appreciates Convertible Stock Bond Stock 300% 303.64%November 25, 1996 $995.00 $51.88Purchased Home Depot Per bond before split Convertible3.25% convertible bond 250% $17.29 BondDue 10/1/01 –Convertible to 43.402 after 3:2 and 200% 211.96% 2:1 splitsshares HD 150%October 1, 1999 $3,011.95 $69.79Sold Home Depot Per bond Including 100%convertible bond dividends ofCallable 10/2/99 $0.23 50%GAIN (LOSS) 202.71% 303.64% 0%Interest Income 9.25%It should not be assumed that recommendations made in the future will be profitableor will equal the performance of the securities listed. All numbers are approximate. 15
  16. Strike Out Example: AOL Time Warner Historical Example: AOL Time Warner What Happens When the Stock Depreciates Convertible 20.00% Convertible Bond Stock Bond November 30, 2000 $501.25 $40.61 10.00% Stock Purchased AOL 0% Per share 9.47% Per bond 0.00% convertible bond - 47.16% Due 12/6/2019 – Convertible to 5.834 -10.00% shares of AOL (Put on 12/6/2004 at -20.00% $639.76 per bond) -30.00% March 28, 2002 $548.75 $23.65 Sold AOL 0% Per share convertible bond Per bond -40.00% -50.00% GAIN (LOSS) 9.47% - 47.16%It should not be assumed that recommendations made in the future will be profitableor will equal the performance of the securities listed. All numbers are approximate. 16
  17. Wellesley’s Three Laws Wellesley Investment Advisors Three Laws of Convertible Investing for Absolute Return / Limited Risk Investing1. Invest in long convertibles. Goal is to maximize returns & protect principal over periods of 7 years.2. Buy converts that have no (or minimal) loss to the next ‘liquidity event.’ A liquidity event is the next call, put or maturity.3. Buy converts with short-term liquidity events. A short-term liquidity event is a put or maturity of 7 years or less. 17
  18. Performance Record Year WIA S&P 500 MLV0A0 1995 20.05% 37.58% 24.75% 1996 10.15% 22.96% 14.30% 1997 22.92% 33.36% 18.98% 1998 16.56% 28.58% 8.21% 1999 19.60% 21.04% 44.32% 2000 17.32% -9.10% -11.70% 2001 11.74% -11.93% -3.95% 2002 3.08% -22.06% -4.95% 2003 15.28% 28.68% 25.80% 2004 6.58% 10.88% 8.49% 2005 3.60% 4.91% -0.34% 2006 9.57% 15.80% 12.75% 2007 7.33% 5.49% 4.12% 2008 -11.09% -37.00% -33.02% 2009 36. 58% 26.46% 47.19% 2010 0.12% -6.65% -0.34% Annualized 11.72% 7.29% 8.11%Annualized returns are from January 1995 to June 30, 2010. Please see performance notes in appendix.The BoA / ML V0A0 represents the US Convertible Market excluding mandatory convertibles.All numbers are approximate. 18
  19. Performance Record Wellesley S&P 500 BOA/ML Convertibles Total Return V0A0 15 Years 11.32% 6.24% 7.34% 10 Years 7.83% -1.59% 2.30%Returns through June 2010Sources: BoA / V0A0 is the US Convertible Index. The S&P 500 Index is designed to be a leading indicator of US Equities.Please see performance notes in appendix All numbers are approximate.
  20. Convertibles as an Asset Class Complete Market Cycle Performance (Annualized):© Clear View Wealth Advisors, LLC. 2010 20
  21. WIA Investment Strategy What Makes Wellesley Different From Other Convertible Managers1. Wellesley only invests in convertible bonds2. Wellesley only invests in bonds with short-term maturities or puts3. Wellesley focuses on absolute returns4. Wellesley can be a core principal protected equity strategy5. Wellesley can be an enhanced fixed income replacement strategy6. Wellesley’s convertible bond strategy has never had a default • Weighted Average Credit Quality: BBB / BBB- 21
  22. WIA Investment Strategy Advantages of Wellesley VS the Big Convertible Managers More Alpha • Ability to acquire smaller convertible bond issues (even from large companies) • Better ability to equitize cash • Manager can react faster to important investment decisions© Wellesley Investment Advisors, Inc. 2010 22
  23. Investing with Convertibles Convertibles can be structured as a Core Principal Protected Equity Strategy Or an Enhanced Fixed Income Strategy© Clear View Wealth Advisors, LLC. 2010 23
  24. Growth of $1,000,000 : January 1995 – March 2010 Performance Record Growth of $1,000,000 : January 1995 – June 2010 7,000,000 6,000,000 WIA:$5,572,662 Total WIA 5,000,000 Advantage over 4,000,000 S&P 500 TR: 3,000,000 87.04% 2,000,000 ML V0A0: $3,350,630 1,000,000 S&P 500: $2,979,356 0Sources: BoA / ML V0A0 is the Bank of America / Merrill Lynch V0A0 US Convertible Index.Please see performance notes in appendix.All numbers are approximate. 24
  25. What Lost Decade? What Would Happen to $1 Million Placed in WIA Convertibles VS the S&P 500? Wellesley Investment Advisors S&P 500 Total Return Annual 5% Annual 5% Year % Inc (Dec) Balance Withdrawal Year % Inc (Dec) Balance Withdrawal 1999 1,000,000 1999 1,000,000 2000 17.32 1,173,235 58,662 2000 -9.10 909,000 45,450 2001 11.74 1,245,423 62,271 2001 -11.93 760,528 38,026 2002 3.08 1,219,538 60,977 2002 -22.06 563,118 28,156 2003 15.28 1,335,634 66,782 2003 28.68 688,389 34,419 2004 6.58 1,352,372 67,619 2004 10.88 725,122 36,256 2005 3.60 1,331,048 66,552 2005 4.91 722,689 36,134 2006 9.57 1,385,530 69,277 2006 15.80 795,030 39,752 2007 7.33 1,412,692 70,635 2007 5.49 796,743 39,837 2008 -11.09 1,193,158 59,658 2008 -37.00 476,851 23,843 2009 36.58 1,548,089 77,404 2009 26.46 572,874 28,644 Total Return: 145.63% Total Return: - 9.10%© Wellesley Investment Advisors, Inc. 2010 25
  26. Convertibles as a Fixed Income Replacement Wellesley VS Pimco Growth of $1,000,000 : January 1995 – June 2010 WIA $5,572,662 Total WIA Advantage: 90.89% PTTAX $2,919,320Sources: PIMCO Total Return Fund A – Ticker Symbol: PTTAXPlease see performance notes in appendix.© Wellesley Investment Advisors, Inc. 2010All numbers are approximate. 26
  27. Fed Tightening Cycles How Do Convertibles Perform When The Fed Tightens?© Clear View Wealth Advisors, LLC. 2010 27
  28. Fed Tightening Cycles Merrill Lynch Fed Policy Rate S&P 500 V0A0 Index Duration Interest Rate Start Date End Date (months) Start Value End Value Increase Change (%) Change (%) 03/29/88 02/24/89 11 6.50 9.75 3.25% 10.38% 11.20% 02/04/94 02/01/95 12 3.00 6.00 3.00% 0.13% -8.46% 06/30/99 05/16/00 11 4.75 6.50 1.75% 6.80% 26.47% 06/30/04 06/29/06 24 1.00 5.25 4.25% 11.58% 8.67%Source: Fed data provided by Deutsche Bank. V0A0 data provided by Merrill Lynch/Bank of America. All numbers are approximate. 28
  29. Notable Convertible Quotations Quote from Forbes Magazine “If you stay out of stocks, you might miss the rally. If you buy stocks, you might get creamed in another slump. But convertible(s)…let you have it both ways. Making good selections from among convertible securities with so many variables is challenging, but very rewarding. Finding the right convertibles is like a game where you can win or, alternatively, get your money back – with interest.”© Clear View Wealth Advisors, LLC. 2010 29
  30. About Steve Stanganelli, CFP®, CRPC® Chief Personal Portfolio Strategist & Money Coach Steve Stanganelli, MSF, CFP®, CRPC® (978) 388-0020 or (617) 398-7494 Steve@ClearViewWealthAdvisors.comSteve Stanganelli is a five-star rated, board-certified financial planning professional who has over 20 years of experience coaching individualsand businesses on ways to improve and protect their personal or business bottom line.Steve has worked with numerous individuals and businesses as a mortgage banker, business owner, business finance consultant and now as aCERTIFIED FINANCIAL PLANNER ™ Professional.His practice encompasses retirement income planning, investment management, divorce settlement analysis and college funding strategies. Heis a published author and regularly presents on these topics to businesses, civic groups and community organizations.Steve works with a variety of individuals and families with a special focus on Baby Boomer pre-retirees, business owners, corporate executivesand medical professionals.Steve earned his Master of Science degree in Finance (MSF) from Bentley College with high distinction. He is also an honors graduate of theUniversity of Massachusetts – Lowell.Steve holds the designations of CERTIFIED FINANCIAL PLANNER ™ and CHARTERED RETIREMENT PLANNING COUNSELOR ™ awarded aftercompletion of extensive, in-depth studying and exam requirements.Steve is an executive officer of the Greater Merrimack Valley Estate Planning Council. Steve, formerly of Methuen, is a resident of Amesburywhere he lives with his wife, Kristin, a Registered Dietitian, and their infant son, Spencer. He is an avid competitive cyclist.
  31. About Clear View Wealth Advisors & The Tool Kit for MoneyClear View Wealth Advisors, LLC is a fee-only state-registered investment adviser.The firm provides personalized financial planning advice on a broad range of topics with anemphasis on retirement income planning, self-directed IRA strategies, college funding andfinancial aid strategies, and divorce planning and settlement analysis.Money management tools are available including customized investment programs forindividuals.We offer a tool kit for money and help people make smarter money moves for life.Clear View: Who We ServeWe work with individuals or couples in need of trusted guidance while going through transitionslike a job change, retirement, divorce or other life-changing event.We strive to make our services accessible to busy professionals and their growing families toassist with retirement planning, elder care or college funding issues.
  32. Wellesley Investment Advisors - FootnotesFootnotes for WIA Convertible Bond Returns1. This presentation reflects only the convertible bond portion of WIAs client accounts. Returns are based on all convertiblebond positions held in accounts of all WIA clients during the periods reflected. Actual client accounts include positions otherthan convertible bond positions. Such other positions are not included in this performance presentation. Accordingly, theactual return of WIA client accounts is different, in some cases substantially, from the performance information presented forconvertible bonds. During the periods reflected, WIA did not manage any other accounts that included convertible bonds intheir portfolios.2. Returns include a 0.00% annual management fee. WIAs standard fee schedule is included in its Form ADV Part II.3. Past performance is not indicative of future results.4. No representation is made that the investor will obtain similar results to those shown above. The performance presentedmay not be representative of investments held in any one client account or performance realized in any one client account. Aninvestors actual performance may differ from the performance presented above due to timing of investment, contributions andwithdrawals. Performance does not reflect the effects of taxation, which result in lower returns to taxable investors.5. This report is meant for broad discussion purposes only, and is not intended as a recommendation to buy or sell any security.6. An investment in convertible bonds involves a risk of loss. The value of an investment in convertible bonds may decrease aswell as increase.7. WIAs convertible returns have been calculated using the methodology set forth below. Such methodology includes severalassumptions that result from systems limitations on aggregating the convertible bond portion of multiple client accounts.Although information has been obtained from and is based on sources WIA believes to be reliable, WIA does not guarantee theaccuracy of the information, and it may be incomplete or condensed. Returns do not reflect reinvestment of interest anddividend income.
  33. Wellesley Investment Advisors 8. Methodology for WIA Convertible Bond Returns: (a) Listed the market value of all convertible bonds held on the last day of each month. (b) Determined the weight of each bond holding in the portfolio (individual bond value / total bond value). (c) Determined each bonds return for the month (monthly interest earned plus / minus monthly price change). (d) Assumed that a bond entered the portfolio on the first day of the month in which it was first purchased. (e) When a bond is completely sold out of the portfolio, its prior month end value is adjusted to reflect the final sales price. (f) Weighted each bonds return for the month by the bonds weight in the portfolio. (g) Summed each bonds weighted return for the month to get the portfolios return for the month. (h) Compounded monthly returns to calculate annual return.Other Footnotes- A complete market cycle is defined either by a top-bottom-top or bottom-top-bottom pattern in the stock market. In the WIAanalysis, the S&P 500 was used to define the market cycle of the stock market.- Bond & Average Credit Quality reflects the higher of the ratings of Standard & Poor’s Corporation, Moody’s InvestorsService, Inc., and Fitch. If a bond is not rated by any of these organizations, Wellesley Investment Advisors uses theirproprietary credit rating system to demonstrate the credit quality of convertible bonds. Ratings are relative, subjective and notabsolute standards of quality.- Alpha statistics provided by Morningstar, Inc. as of June 30, 2010.
  34. Appendix: Convertibles as an Asset Class 1 Year 3 Years 5 Years 10 Years All US Convertibles (VXA0)* 22.64% -6.79% 17.70% 22.84% VXA0 Underlying Equities* 28.38% -30.78% -6.73% -27.19% S&P 500 14.43% -26.62% -3.90% -14.77% Russell 2000 21.50% -23.65% 1.93% 34.99% Through 6/30/10 *Source: BofA Merrill Lynch Convertible Research 6/30/10© Wellesley Investment Advisors, Inc. 2010Please see Wellesley performance notes in appendix.
  35. Appendix: A Fairly Balanced Universe of CB Issuers Source: BofA Merrill Lynch Convertible Research 6/30/10© Wellesley Investment Advisors, Inc. 2010
  36. Appendix: Convertibles as an Asset Class Convertibles From an Issuer Viewpoint:  Less dilutive than common stock offering, issuer monetizes volatility  Less costly than pure debt offering, and potential conversion to common by holders if equity performs  no principal repayment  Expand investor base – flexibility, less restrictive covenants  Recent innovations provide tax and EPS advantages  Exchangeable structure allows for monetizing a stake in another company • Defers capital gains until maturity  Part of the classic financing chainSource: Barclays Capital© Wellesley Investment Advisors, Inc. 2010
  37. Appendix: Convertibles as an Asset Class Why convertibles cannot be replaced with Equities, Bonds and Options: a) Unlike Bonds and options, many convertible bond holders can obtain a certain amount of underlying shares in exchange for the convertible bond structure at any time. b) Unlike options, most convertible bonds have dividend and takeover protection. c) Convertibles offer optionality for companies where there is no liquid option market. d) Convertible bond market tendency is to offer investors the opportunity to buy volatility exposure at a relatively cheap price e) Convertible bonds offer issues “suboptimal” call featuresSource: 2007 UBS Global Asset Management (Americas) Inc.© Wellesley Investment Advisors, Inc. 2010

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