Gabelli fund manager points to the east, Japan in fact, for convertibles to best global benchmarks

By Ronda Fears

Nashville, April 8 - Coming into 2004, fund managers were thinking it would be very difficult to make money as credit spreads would surely be widening from the incredibly tight levels reached last year and the stupendous gains in stocks would slow considerably.

Hart Woodson, portfolio manager of the Gabelli Global Convertible Securities Fund, agreed. But he began focusing on Japan and Asia, and that helped the fund turn in first quarter returns that bested its benchmark as well as global equity and fixed-income indexes.

The fund marked a gain of 3.95% for first quarter, compared to a gain of 2.86% for its benchmark, the Merrill Lynch global 300 convertible index. It also bested the MSCI global equity index gain of 2.2% and global fixed-income indexes showing gains of about 2% for first quarter.

"It's nice to have a global mandate," Woodson said in a chat with Prospect News this week.

"The real story is in Japan."

During first quarter, Woodson boosted the fund's holdings in Japan and Asia from the typical 15%-20% to 26%. He also noted that while his turnover rate is traditionally low, in first quarter he traded more actively in the Asian issues, particularly during March.

In Japan, during the quarter, he took profits in names like USS, Yamaha Motor, Nissin, Shoei, Fuji Seal and added new positions in Yokohama Reito, Bank of Fukuoka, Toyo Ink, Mitsui Fudosan and added to Nippon Seiki. Also, in Taiwan he picked up Asia Optical, China Trust and Hon Hai Precision Industry Co.

He believes this is not another flash-in-the-pan spike related to the bounce in Japanese stocks but rather feels like the start of a long-staged recovery.

The Japanese economy grew at an annual rate of 6.4% in fourth quarter 2003, the fastest in 13 years, Woodson noted. About a quarter of that growth was due to a rise in net exports, but he also pointed out that there are signs that the latent consumer may join the export-led recovery as retail sales in Japan rose 1.7% in February and year-over-year household spending is up 6.9%, the largest gain since 1982.

Another important sign of the recovery is that deflation may be abating, he said, noting that consumer prices in Japan, excluding fresh food, were unchanged in February year over year.

Lastly, Woodson noted that Standard & Poor's recently revised its assessment of Japanese national credits from negative to stable and kept its long-term rating unchanged at AA-.

Looking for yield

Outside of the geographic emphasis, the fund also is striving to boost current yield - an ever-increasing challenge with interest rates so low and credit spreads having come in so sharply. Woodson also noted that Gabelli has a new closed-end fund specifically directed to current yield investments, including convertibles.

The global portfolio has a weighted average current yield of about 3.2%, adjusted conversion premium of 18% and a credit rating of BBB+.

"It is harder to find attractive yields and attractive risk/reward scenarios," Woodson commented.

"Out-of-favor triple-Bs will give you 5 to 5.5%, like McKesson, Newell, while to get north of 7.5% you need to drop down to triple-C or single-B, like Cincinnati Bell, Six Flags, Owens Illinois, et cetera.

"On the credit side, you have to be very selective. It's been very tricky for an outright long investor. Research is key in picking the right names."

Finally, with the new dividend tax law, he is constantly on the lookout for convertibles that are qualified for this favorable treatment, like the new Freeport-McMoRan Copper & Gold convertible preferreds. Convertible preferreds in general, he said, are good additions to the portfolio for the current yield with much lower duration risk than straight debt, capital appreciation and potential volatility pick-up.

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