As the fund’s name suggests, it also invests in equities – and these are the assets that currently dominate the portfolio, driving returns over the past three years.
The largest holding in the fund, for instance, is Sony. Gabelli expects the launch of the Japanese firm’s new PlayStation, alongside operational improvements in its consumer electronics and entertainment divisions, to continue to drive earnings growth. He has also tipped the potential spin-off of the Columbia film studio and the Sony Music label as catalysts for further gains.
On the convertibles side, Gabelli owns bonds issued by the likes of truck-maker Navistar and gold specialist Newmont Mining.
Franklin, my dear
While it is just behind Gabelli’s strategy in total-return terms over the past three years, its information ratio is noticeably lower. That's due to its higher volatility – a standard deviation of 7.8 over three years, compared with 6.6 for Gabelli. That said, it has significantly outperformed over a five-year timeframe.
The Franklin fund’s largest position is in Liberty Interactive convertibles, which are exchangeable for common stock in Charter Communications – a legacy of the unwinding of the former Liberty Media group.
The $106 million Victory INCORE Investment Grade Convertible fund is also primarily invested in convertible bonds, but has a 24% weighting to convertible preferred stock. Run by the Citywire + rated team of Amy Bush, James Kaesberg and Mark Vucenovic, it is the only other fund in this sector with positive risk-adjusted returns over the past three years.
Bush, Kaesberg and Vucenovic highlighted a recent example of the type of idiosyncratic opportunity available in the convertible market. During the third quarter, convertible bonds issued by chip-maker Nvidia were removed from the main Bank of America Merrill Lynch index because their issue size had fallen below the benchmark provider’s minimum threshold following a series of conversions into equity.
The Nvidia bonds had entered the investment grade index in early September 2016, at a weight of nearly 10%. Until their departure from the index at the end of August this year, the convertible bonds returned 169%, contributing 6.1% to the full index’s performance – ‘awesome numbers indeed for less than a year in the investment grade convertible indices,’ the Victory Capital team remarked.
The trio trimmed the fund's stake in Nvidia bonds during the third quarter as they ‘continued their skyward climb.’ The managers also initiated positions in two BB-rated housing-related issuers during the period: home-builder CalAtlantic Group and private mortgage insurer MGIC. Both of these convertible bonds have lower delta – meaning they are less sensitive to equity prices – and fit into the portfolio’s defensive sleeve. Overall, the fund’s delta is 55%.