Vanguard Convertable Securities

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HotRod140
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Vanguard Convertable Securities

Post by HotRod140 » Sat May 09, 2009 6:30 am

Anyone have any knowledge on this fund. Would this fund fit into a bond or stock portion of a portfolio. I admit I know nothing regarding this subject, just throwing it out there.

Thanks

tutaloo
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Post by tutaloo » Sat May 09, 2009 6:45 am

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SpringMan
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Post by SpringMan » Sat May 09, 2009 9:40 am

I don't currently own this fund but used to own Fidelity convertibles fund. I counted it as equity rather than fixed income. I believe it could by classified as a hybrid fund. There seems to be a lot more risk than with a bond fund. I currently don't use convertibles or junk bonds based on some of Larry Swedroe's posts. I am sure there are others that would recommend them.
Best Wishes, SpringMan

Valuethinker
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Post by Valuethinker » Sat May 09, 2009 9:58 am

SpringMan wrote:I don't currently own this fund but used to own Fidelity convertibles fund. I counted it as equity rather than fixed income. I believe it could by classified as a hybrid fund. There seems to be a lot more risk than with a bond fund. I currently don't use convertibles or junk bonds based on some of Larry Swedroe's posts. I am sure there are others that would recommend them.
Best to think of them as a cross between a high yield bond and equity.

1. your tax position is bad with such a fund. Beware situations like this one where you convert low tax capital gains and dividends into higher taxed interest income

2. generally the issuers of convertible bonds are higher risk companies. So you have significant credit risk

3. at one point earlier in the year, the credit markets were so disrupted you could buy these bonds and get the equity option (the call option to convert into the company's shares) for free. It was an attractive entry point. That anomaly has mostly gone away, I think

4. a lot of convertibles were issued by financial services companies so you have significant sectoral risk

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spam
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Post by spam » Sat May 09, 2009 10:30 am

I own the Fidelity Convertables fund FCVSX. In theory, it acts like a bond fund when the underlying share price is low (yield now somewhere around 6%) and more like stocks when the underlying share price is high.

The last I looked, they owned convertable securities in the Service Sector (minus healthcare) Consumer Goods, and Information Hardware. In contrast, their top holdings are in Energy, and Metals mining. Their P/E ratio was around 9.

In all, I think they are loaded with financial / business services sector offerings. If you buy low, then I look at them like a junk bond type of fund with a potential for equity-like returns.

tutaloo
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Post by tutaloo » Sat May 09, 2009 10:35 am

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bearcub
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Post by bearcub » Sat May 09, 2009 11:09 am

You may want to look at Greenspring fund. An odd fund that combines convertables with small-cap value stocks. Its the only non-Vanguard fund I own. E.R. is 1.06. I have owned it since my pre-Vanguard days and it has treated me good. Its not for everyone but the whole company itself is invested in the fund which I kind of like to hear.

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