Salomon halts shift to equity-sensitive issues in recommended convertibles portfolio

By Peter Heap

New York, Aug. 8 - Salomon Smith Barney convertible analysts have put the brakes on recent moves to make their recommended convertibles portfolio more equity sensitive saying "skittishness" in the equity markets creates the risk of being caught in another wave of selling.

Earlier in the year the analysts had started making changes to take advantage of what they had anticipated would be a "broad-based" stock market rally.

"Boy, were we wrong about that rally," the analysts admitted in a report Thursday.

For only the second month this year, the model portfolio failed to outperform the Salomon Smith Barney Convertible Index although it is still ahead year to date. For July the recommended portfolio returned negative 6.75% versus negative 5.73% for the index. Year to date the portfolio is negative 3.81%, 950 basis points ahead of the benchmark's negative 13.31% return.

Analysts Adrian Miller, Stuart Novick and Lynn Hambright added that the losses in July were cushioned by the relatively conservative structure of the portfolio. It still contains zero-coupon bonds, convertibles from "solid" credits and short-maturity paper from companies with lower credit quality - a strategy that served well in 2001, the three noted.

Going forward, the analysts are making only minimal changes to the recommended portfolio, explaining: "We'd prefer to miss the bottom on the way up rather than get caught in a barrage of further selling."

Changes made at the end of July are swapping into Clear Channel's 1.5% convertibles due 2002 from Clear Channel's 2.625% convertibles due 2003 and removing the Sanmina 0% convertible due 2020.

On Clear Channel, the analysts said the preferred Clear Channel issue matures in December, ahead of the put on Clear Channel's zeroes in February and the maturity of the 2.625s in April. In addition the 11.3% yield to maturity on the 1.5s "looks in line, if not a touch better than the yield to maturity/put on the other issues."

For Sanmina, the analysts said they are removing the issue from the model portfolio because of "low visibility regarding the company's prospects." They added that they would prefer the earlier maturing 4.25% convertibles due 2004 but are not ready to add them to the portfolio at the moment because of concerns about Sanmina's balance sheet.

As far as July's performance is concerned, only six securities in the recommended portfolio managed positive returns for the month and only one, Juniper Networks' 4.75s, turned in results that could be called "outstanding." Just one other issue, Vertex Pharmaceutical's 5s, returned more than 1%, in this case 2.05%.

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