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Wellesley Investment Advisors now managing over USD2bn in convertible bonds


Wellesley Investment Advisors has surpassed USD2bn in convertible bonds under management.

The firm caters for high net-worth individuals, institutions, pensions, family offices, banks, and RIAs.
“We are seeing renewed demand for convertible bonds, as investors react to historically low interest rates, near-record stock prices and a pickup in volatility,” says Greg Miller, Wellesley’s co-founder and co-chief investment officer. “Investors seeking the benefits of convertible bonds should be aware that most convertible managers and convertible funds do not invest exclusively in convertible bonds, or even exclusively in convertible securities. By investing only in principal-protected convertible bonds, we attempt to help make sure that our clients limit their downside risk over full market cycles, while preserving significant upside potential.”
Miller says many funds with the word “convertible” in their name have significant investments in non-convertible securities, such as stocks and other non-principal protected securities.
“A fund can call itself convertible even if 20 per cent of its holdings are in something else. If 20 per cent of your fund drops by 50 per cent, then even if the rest of your fund is stable, you are down 10 per cent right there. These funds can also own certain types of convertible securities that do not afford holders the same principal protection as convertible bonds. Convertible preferred shares and mandatory convertible bonds expose investors to largely the same downside exposure as the underlying common stock.”
“Even convertible bonds are not all created alike,” adds Michael Miller, Wellesley’s other co-chief investment officer. “Most convertible bonds with maturities of 20 and 30 years give investors the right to ‘put’ the bonds back to the issuer within five years of issuance. Wellesley not only invests exclusively in principal protected convertible bonds, but we require all portfolio candidates to have what we term a ‘liquidity event’ in seven years or less.
“You need to be able to see that light at the end of the tunnel. Keeping relatively short time horizons also reduces client exposure to both stock and interest-rate movements.”
He advises convertible investors to make sure that the managers they hire are preserving the favourable risk/reward benefits unique to convertible bonds.
“Clients have shown us portfolios run by other managers. Often these portfolios have nearly as much downside risk as equities. It’s important not only to buy the right kind of convertibles but to rebalance, attempting to maintain the ideal blend of income, protection and upside.”

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