Advent Claymore convertible fund aims for income, upside with minimized equity risk

By Ronda Fears

Nashville, Sept. 16 - At a time when many pundits are forecasting a stock rally, lots of convertible investors are searching for exposure to those potential gains. Advent Claymore Convertible Securities and Income Fund Inc. looks to minimize equity risk and, as the name suggests, focus on income.

While the fund's focus is on income, which is sensitive to factors such as credit spreads, there also is some benefit to potential returns in general from the equity component of convertibles due to the recent contractions in conversion premiums in the convertible market.

The closed-end fund was launched April 30 and has $797.85 million in total assets.

F. Barry Nelson, who has been involved in the convertible market for 29 years, is portfolio manager. He is senior vice president of Advent Capital Management LLC in New York, which is the investment advisor for the Advent Claymore fund.

"If you look at the portfolio we have constructed, this is not a risky portfolio," Nelson said.

Convertibles are generically described as having half the downside risk of the equity market, he said, but an income-oriented strategy doesn't have even that much risk.

"Income-oriented convertibles have a pronounced tendency to not lose money, if one avoids defaults," Nelson said.

Advent Capital Management, which manages approximately $3 billion in assets, has successfully steered away from bonds that went into default or preferreds involved in a dividend blow-up, Nelson pointed out.

The Advent Claymore fund is committed to investing at least 60% of assets in convertibles, with most of the remainder in high-yield bonds. While the goal is to remain fully invested, at any given time there could be a fraction showing up in "other" places, such as cash. Under the prospectus, the fund is required to be 80% invested.

As of Aug. 31, the fund's split was 63% in convertibles, 36.4% in high-yield bonds and 0.6% in other places.

Convertible holdings in the fund are tilted toward investment-grade credits, which serve to offset credit risk from the high-yield portion of the portfolio.

High-quality convertibles have been punished by the dividend scare that has swept through the market in 2003, Nelson said, but busted convertible names have not been affected and the situation may have been blown out of proportion.

The fund's top 10 holdings, as of Aug. 31, were General Motors Corp., Alltel, Rite Aid Corp., Chubb Corp., Northrop Grumman Corp., Hartford Financial Services Group, UnumProvident, CSC Holdings, Lucent Technologies Inc. and AT&T Corp.

By industry sector, the fund is most concentrated in financials at 16.3%, and technology at 14.9%.

The fund also is authorized to leverage up to 35%, through auction market preferreds, but is currently leveraged under 30%. Fund materials suggest the tack is deliberately conservative.

Low short rates, deficit spending by the U.S. government and the livelihood of the capital markets all provide a positive backdrop for an income-oriented strategy, Nelson added.

"We feel pretty good that credit spreads at least hold where they are or get tighter," Nelson said.

"We're comfortable with high-yield spreads that are near their historical norms."

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