Thursday June 14, 2012
by Mark Salzinger, editor No-Load Fund Investor
Harbor Convertible Securities (HACSX) is a new, promising fund whose managers have a strong record running institutional convertible-bond portfolios.
In the current market environment, convertible bond funds make sense as a lower-risk alternative to small-cap equity exposure, especially for investors who prefer some current yield.
Convertibles are hybrid securities, often issued by smaller companies with credit ratings below investment grade. They can be redeemed for stock (“converted”) at a predetermined price and quantity.
The fund debuted in May 2011, but its managers, Mark Shenkman and Raymond Condon of Shenkman Capital Management, have built a solid record managing institutional and separate accounts focused on convertibles.
They prefer convertibles whose valuations are more closely related to a company’s bonds than to its stock, acknowledging that in doing so they are trading upside appreciation potential for downside protection of principal.
They look at the resiliency of the convertible security as if it were a pure bond, considering a company’s financial position and the risks of its other outstanding debt.
At the same time, they’re also looking for some kind of catalyst that would spur appreciation in a company’s equity. They also assess the volatility of the underlying stock, which will affect the value of the conversion option.
The managers also emphasize broad diversification to help limit risk. The fund has about 80 securities in its $95 million portfolio.
Over the past year, Harbor Convertible Securities is down just 2.0%, vs. losses of 8.8% or more for its peers.
Such limited downside has been the norm for Shenkman Capital’s convertibles accounts: in aggregate, such accounts declined just 21.2% in 2008 even while managing to achieve a 42.8% rebound in 2009.
The Harbor offering’s expense ratio of 1.22% is high. As expenses come first out of income, the higher expense ratio has the effect of dampening the yield, recently 2.1%.
However, the low risk and solid performance exhibited by Shenkman Capital makes up for the higher expenses, and we recommend the fund for conservative, income-oriented investors. It has a $1,000 minimum initial investment.
Learn more about this financial newsletter at Mark Salzinger's No-Load Fund Investor.