Froley Revy convertible arbitrage fund takes market-neutral strategy

By Ronda Fears

Nashville, Tenn., March 20 - As Froley Revy Investment Co. Inc. moves into convertible arbitrage, portfolio manager Michael Revy said the focus will be on a diversified, market-neutral strategy aimed at boosting returns above those of the traditional outright convertible fund.

Initially, the fund is beginning with $50 million and would max out at $500 million. Revy will co-manage it from New York.

"We don't want the fund to get too large, but we want to be in the market," Revy said.

As for strategy, it is nothing extraordinarily sexy, but it expands Froley Revy's product after some three decades as a traditional outright convertible fund and one of the most highly regarded convertible bond managers out there. Los Angeles-based Froley Revy, founded in 1975, has more than $2 billion in assets under management. The firm was acquired by San Francisco-based First Republic Bank in February.

"We will want to preserve capital and have a product with above-average fixed income return and low volatility," Revy said.

"It's a different level of risk [compared to Froley Revy's existing outright funds]. But really we're looking for the bread and butter issues, with a standstill return above the 2-year Treasury."

The fund will look for smaller, busted names "where we feel we know the credit," Revy said, but hold only 10% at most. The core of the convert arb fund will be at-the-money or near-the-money issues. And, he said, probably 30% will be deep-in-the-money. He said he will be keeping the delta of the portfolio holdings to within a 10% bias in either direction of zero.

"We want coupon-payers and a few, but not too many, preferreds and mandatories," Revy said.

Diversified particularly applies to industry sectors, he said, coupled with the delicate balance of picking stocks and credit analysis.

"You have to pick the winners," Revy said. "But you have to understand both worlds - equity and credit. Froley Revy has a strong reputation of doing its homework."

One of the more notable trends in the convertible market right now is the evaluation of leverage, he noted, in a rising interest rate climate.

"There is a lot of guesswork as to where the credit is, and if you're leveraged it could be painful," Revy said.

In this climate, he said, the challenge is to assess the credit risk while choosing equities that will be on the rise in spite of rising interest rates.

Revy has more than 10 years of buy-side and sell-side investment banking experience. He most recently was at Wechsler & Co. in New York, where he worked as a private banker structuring private equity deals and managed investments in various companies.

Previously, he was with Lehman Brothers, where he performed convertible research and built that firm's existing convertible risk management systems, among other responsibilities.

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