Insulation from Volatility

Home Investment Discipline Insulation from Volatility Holdings Biographies Performance Quarterly Commentary

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%.

Carr & Associates Convertible Bond Price Changes, August 24, 2001 - September 21, 2001

Common Stock Convertible Bond
Closing Price Closing Price %        Closing Price Closing Price %    
Company 8/24/01 9/21/01 Change     8/24/01 9/21/01 Change
Avon Products   45.89   44.04  -4.03     51.13   51.25    0.24
Bell Atlantic/New Zealand Tel   17.85   14.15 -20.73     100.50    101.25      0.75 
Diamond Offshore   27.90   26.35   -5.56     83.50   84.13    0.75 
Federal Realty Trust   23.62   20.32 -13.97     93.25   87.13   -6.57 
INCO   17.55   12.45 -29.06    99.38   97.25   -2.14 
National Data   37.90   31.28 -17.47     113.25     102.00     -9.93 
Omnicare   24.80   19.15 -22.78     91.75    85.88   -6.40 
Quanex   26.75   20.99 -21.53   100.00      92.63   -7.38 
Reliant Energy   30.42    27.95   -8.12       93.50    94.88    1.47
Scholastic Corp   37.95   38.60   1.71   108.63     110.13       1.38 
Average -14.15     -2.78
DJIA 10423.20      8235.81  -20.99    -20.99  
S&P 500   1184.90      965.80   -18.49     -18.49  
NASDAQ   1916.80     1423.19   -25.75     -25.75  
  Home Page