How Convertibles Can Help Drive Your Portfolio

Most people want their money to generate some blend of (1) capital preservation, (2) current income, and (3) appreciation potential.

When you think about it, very few individual investments offer all three. Stocks can give you appreciation and dividend income. Some are safer than others—at Cutler we like community banks because we buy them at small premiums to their tangible equity value. But no stock can structurally offer capital preservation.

Convertibles And The Three Essential Properties

Convertibles are one of the few exceptions. For a rule of thumb*, convertibles provide about two-thirds of the upside of stocks, though this can vary significantly depending on the price and terms of the issue. You can’t get that from regular bonds. But convertibles also provide income—usually less than traditional bonds, but more than stocks, especially given that many convertible issuers do not pay dividends.

And most importantly, they have considerably better downside protection than stocks. The rule of the other thumb* is that convertibles typically only experience one-third of the downside of stocks over time. It’s often even less—usually no downside at all if you hold to maturity…

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