Barclays removes Friends Provident, adds Old Mutual, KfW/Deutsche Telekom

By Ronda Fears

Nashville, July 18 - Barclays Capital convertible analysts continue to take a defensive view in their recommended European convertible holdings and have replaced the Friends Provident issue with the Old Mutual convert.

Also, with the call of the Deutsche Bank/Novartis issue, they have added the new KfW/Deutsche Telekom issue.

For the first half of 2003, the group's recommended European convertible portfolio delivered a total return of 5.63% with an annualized standard deviation of 1.94% on an equal-weight basis for the holding period from Jan. 15 to July 15.

That compares favorably on a risk-return basis to the benchmark - the Goldman Sachs/Bloomberg Europe Convertible Index, which yielded a total return of 3.23% over the same period with a standard deviation of 5.37% - as well as to other asset classes, the analysts said.

"The risk-return characteristics of the individual securities show a particularly strong second-quarter performance for Friends Provident 5.25% 2007 and Parmalat 0.875% 2021, both of which we switched into after the Q1 review in mid-April," Barclays analysts Luke Olsen said in a report Friday.

"The worst performer was Nestlé 0% 2008 (down 1.3%), which was the only negative contribution to the overall return."

The group removed Friends Provident issue, however, following its strong, if relatively volatile, performance. "It has become highly equity sensitive (delta of around 50%) and can no longer be considered a defensive convertible," Olsen said in the report.

Instead, the group selected the Old Mutual 3.625% due 2005, based on its attractive implied volatility around 30% and downside protection, as it trades within a point of its bond floor, with the benefit of some equity upside with a delta of around 9%. "In addition, investors may benefit from the $/£ currency option, although the convertible is far out-of-the-money," Olsen noted.

Also, Deutsche Bank has called its exchangeables into Novartis, effective Aug. 12, so the group replaced it with the newly issued KfW 0.75% exchangeable due 2008 which converts into Deutsche Telekom, "although is does not perfectly fit our selection criteria.

"However, we still feel it is appropriate to add this record convertible bond issue, as we expect it to be included in all of the benchmarks and to be widely held. In addition, we have a positive outlook on the banking sector, in line with our credit analysts' relative value overweight. Lastly, we think that KfW's stable credit profile to some extent mitigates the rather high delta (around 50%) of the convertible."

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