Convertible bonds are an asset class that can provide diversification benefits to most investment portfolios. A convertible bond is a type of fixed-income security that the holder can convert into a predetermined number of shares of common stock in the issuing company or cash of equal value. Convertible bonds usually have high yields. They provide some downside protection, because the value of the convertible bond can only fall to the value of the bond floor. Convertible bonds maintain the upside potential of equity returns and are usually less volatile than the company's equity shares.
Lord Abbett Convertible Fund (LACFX)
The Lord Abbett Convertible Fund ("LACFX") seeks to deliver current income and the opportunity for capital appreciation by investing primarily in convertible securities. It is supported by 48 investment professionals, each with an average of 13 years of investment industry experience. The fund's current allocation is 87.1% convertible bonds, 7.9% equity, 3.4% high-yield bonds and 1.7% cash and equivalents. As for credit quality, 55.5% of the fund's 105 individual investments are rated B or above. However, 45.5% of the remaining securities are not rated. The average coupon on the securities is 2.44%, and the average maturity is 8.49 years. The fund's 30-day yield is 3.05%. The Lord Abbett Convertible Fund has an expense ratio of 1.06%, notably below the 1.37% Lipper Category average expense ratio of convertible bond mutual funds.
The Lord Abbett Convertible Fund has a tiered sales charge load that starts at 2.25% for people investing $100,000 or less. This tiers down and eventually reaches 0% for those investing $500,000 or more into the fund.
Fidelity Advisor Convertible Securities Fund (FACVX)
The Fidelity Advisor Convertible Securities Fund ("FACVX") seeks a high level of total return through combined current income and capital appreciation by investing at least 80% of its assets in convertible securities and sometimes common stock. This is one of the largest convertible bond mutual funds on the market, with $1.7 billion in assets under management (AUM). The fund has 89 different investments issued by 80 different issuers, with the top 10 investments equaling 42.73% of the total portfolio. The current portfolio is allocated as follows: 39.03% in convertible bonds, 36.79% in convertible preferred stock, 22.69% in equities, and 1.49% in cash and other assets. The Fidelity Advisor Convertible Securities Fund's 30-day yield is 2.28%, and its expense ratio is 0.84%. The fund has a minimum initial investment of $2,500 and a minimum balance thereafter of $1,000. The fund also has a maximum load of 5.75%, but according to the prospectus, investors may qualify for sales charge discounts.
Vanguard Convertible Securities Fund (VCVSX)
The Vanguard Convertible Securities Fund ("VCVSX") seeks to provide current income and long-term capital appreciation by investing in a broadly diversified portfolio of U.S. and foreign convertible securities and by using a bottom-up investing approach. This fund has $1.5 billion of AUM, making it one of the largest convertible bond funds available.
The Vanguard Convertible Securities Fund has distinct advantages over the Lord Abbett Convertible Fund, the Fidelity Advisor Convertible Securities Fund and many others that make it one of the most inexpensive convertible bond mutual funds on the market. It does not have a load, and it has a very low expense ratio of 0.38%.
The Vanguard Convertible Securities Fund invests in 159 different securities, and it has an average coupon of 2.1% and an average duration of 5.6 years. The current allocation is 93.3% in bonds, 5.1% in stocks and 1.6% in short-term reserves. The investments within the convertible securities are spread across all sectors, but the majority of the investments are in the information technology, financials, health care and consumer discretionary sectors.