2 Good Funds for Convertible Bond Investors

Zachary Patzik: The Morningstar convertible securities category is a small group of funds that focuses on unique and hybrid issues. MainStay MacKay Convertible and Columbia Convertible Securities both earn Morningstar Analyst Ratings of Bronze. Each of these offerings are led by experienced portfolio managers that have large and capable analyst teams at their disposal. However, each of these funds have been successful through different approaches.

The MainStay MacKay Convertible team quantitatively screens the convertible universe to exclude companies with small market capitalizations and those with low issuance, as well as busted securities with bondlike characteristics and deep-in-the-money convertibles, which are equity-sensitive and trade in tandem with company stock. Ultimately the team looks for catalysts, such as share repurchase programs or restructurings that they believe will support stock price appreciation in a six- to 18-month period. The resulting portfolio is generally more concentrated than its peers.

Meanwhile, Columbia Convertible Securities targets a wider array of companies in both market capitalization and credit rating in an effort to construct a portfolio that is representative of the convertible securities market. This also means that the fund incorporates the busted and more equitylike securities that MainStay MacKay Convertible excludes from the get go. Overall, the team prefers to make individual bets on companies over industries, yet modest active positions at the industry level are observed in the portfolio. This contributes to the fund's delta, a measure of equity sensitivity, being near that of its benchmark.

Despite these different investment frameworks, both funds have generated strong returns and rewarded investors over the long term.