Insulation from Volatility
Essentially,
there are three reasons to buy a convertible security rather than a common
stock. First, convertibles yield more, usually a great deal
more. Second, convertible securities are higher in quality, and
third, their price movements are generally far less volatile.
Moreover, given an equal move up or down in the price of the underlying
common stock the convertible security will go up more than it will
decline. Whenever the stock market averages experience sharp and
significant declines over a short period of time we calculate the returns
of our convertible bond holdings relative to those of the major stock
averages. Between the markets' close on Friday, September 12, 2008, and the end of trading on
September 17, 2008, the
Dow Jones Industrial Average declined 7.11%. The S&P 500 fell 7.61% and the NASDAQ composite dropped
7.18%. In contrast, the convertible
bond holdings of client portfolios managed by Carr & Associates
exhibited little sensitivity to these declines. The convertible bond positions
in Carr & Associates clients' portfolios declined just 3.68%,on average,
although
their underlying common stocks fell by 6.30%, on average. Over the 20 years
since the inception of Carr & Associates, client portfolios have, on
average, enjoyed returns equaling 81% of those of the S&P 500, with just
37% of the risk, even after our management fees.
While past performance is not necessarily indicative of future results,
these kinds of results in market downturns have been typical in the
past.
|
Carr & Associates Convertible Bond Price
Changes |
|
May
5 - 20, 2010 |
|
|
|
Convertible Bond |
Common Stock |
|
|
Closing Price |
Closing
Price |
% |
Closing Price |
Closing Price |
% |
|
Company |
5/5/10 |
5/20/00 |
Change |
5/5/10 |
5/20/10 |
Change |
| Affiliated
Managers |
101.00 |
97.50 |
-3.47 |
81.07 |
71.29 |
-12.06 |
| Anixter
International |
100.38 |
99.00 |
-1.37 |
51.73 |
49.47 |
-4.37 |
| Bristow Group |
89.38 |
86.38 |
-3.36 |
37.43 |
31.64 |
-15.47 |
| Electronic
Data Systems |
95.50 |
92.50 |
-3.14 |
N.A. |
N.A. |
N.A. |
| Intel |
99.75
|
96.88
|
-2.88
|
21.17 |
20.79
|
-1.79 |
| L-3 Communications |
104.75 |
101.50 |
-3.10 |
92.56 |
82.62 |
-10.74 |
| Liberty Media/Motorola |
59.50 |
59.50 |
0.00 |
6.87 |
6.61 |
-3.78
|
| Massey Energy |
81.75 |
78.38 |
-4.13 |
34.97 |
29.96 |
-14.33 |
| Medtronic |
99.25 |
99.25 |
0.00 |
43.00 |
40.32 |
-6.23 |
| Prologis |
93.12 |
90.28 |
-3.05 |
12.61 |
11.18 |
-11.34 |
| U. S. Bancorp
fltr |
96.25 |
95.40 |
-0.88 |
26.42 |
23.21 |
-12.15 |
| Vornado Realty Trust |
101.12 |
99.75 |
-1.35 |
79.89 |
73.49 |
-8.01 |
| Xilinx |
92.25 |
88.25 |
-1.70 |
24.92 |
23.91 |
-4.05 |
|
Average |
|
|
-2.75 |
|
|
-8.69 |
|
DJIA |
11421.99 |
10609.66 |
-7.11 |
|
|
-11.47 |
| S&P
500 |
1251.70 |
1156.39 |
-7.61 |
|
|
-7 |
| NASDAQ |
2261.27 |
2098.85 |
-7.18 |
|
|
-7.18
|
A much more dramatic example is shown below. On Monday, September
10, 2001, we had prepared a table showing comparisons over the period
August 24 through September 7, 2001 when the Dow Jones Industrial Average,
the S&P 500 and the NASDAQ were down 7.84%, 8.37% and 11.95%,
respectively. Then, on Tuesday morning, September 11, in unbelieving
horror, we watched the destruction of the World Trade Towers. The
reopening of the equity markets on Monday, September 17, provided the
equity markets with the first opportunity to react to the terrible events
of September 11. Stocks continued to fall and, by the end of the week, had
reached selling climax levels. The Dow Jones Industrial Average had
recorded a four-week fall of 20.99%. The S&P 500 and the NASDAQ
were off 18.49% and 25.75% respectively over the August 24 - September 21,
2001 period. Once again, our convertible portfolios held their value
well, with the bond portfolios declining just 4.60%, on average, although
the common stocks of these issues were down 20.07%, on average. The
10 largest positions, shown below, were off just 2.78% on average, while
their common stocks dropped 14.15%.
