Barclays euro convertible portfolio returns 1.81% in last 3 months; four changes made

By Ronda Fears

Nashville, April 17 - Barclays Capital's recommended European convertible portfolio was bested in early 2003 only by high-yield bonds, which also exhibited twice the volatility, said Luke Olsen, head of convertible research, in a report Thursday.

The recommended list of convertibles for the period from Jan. 15 to April 15 yielded a total return of 1.81% with an annualized standard deviation of 0.93% on an equal weight basis.

That beat its benchmark, the Goldman Sachs/Bloomberg Europe Convertible Index, which yielded a total return of -0.45% with a standard deviation of 2.33%, as well as most other asset classes

"Apart from the benchmark, the portfolio outperformed the iBoxx bond indices and at the same time offered lower volatility," Olsen said in the report.

"In fact, only high-yield bonds delivered a higher total return, but with approximately twice the volatility."

The risk-return characteristics of the individual securities in the recommended portfolio show a strong first-quarter performance for Saint Gobain's 2.625% convertible due 2007 and Dixons/Wanadoo 1% due 2004, each returning around 5%.

The worst performer was Belgelec/Total Fina 1.5% due 2004, which was the only negative contribution to overall return, down 0.1%.

Olsen said it is important to maintain portfolio diversification, as most of the individual securities displaying a much higher volatility than the portfolio as a whole.

Thus, four changes to the portfolio were being recommended.

None of the new European convertible bond issues so far this year met inclusion criteria, he noted, either because of their heavy equity sensitivity as with the Deutsche Telekom mandatory or due to the lack of credit comfort as with the new Rallye issues.

Removed were the Roche yen-denominated 0.25% due 2005, Wolters Kluwer 1% due 2006, Dixons/Wanadoo 1% due 2004 and the Parmalat 1% due 2005.

Those were replaced with the Friends Provident 5.25% due 2007, Lafarge 1.5% due 2006, Suez/Vinci 1% due November 2003 and the Parmalat 0.875% due 2021.

In regard to replacing Roche with Friends Provident, Olsen noted that the Barclays financials credit analysts suggest a relative value overweight in Friends Provident, "although this only applies for a one-month horizon, and the security offers attractive current and redemption yields with a balanced risk profile."

The Dixons/Wanadoo issue had a strong, if relatively volatile, first-quarter performance, he noted, but the Suez/Vinci convertible is with an issuer that is favored by Barclays credit analysts as a relative value overweight.

The switch in Parmalat issues, he said, was primarily on the basis of valuations.

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