Froley Revy trims outright investment team, leans on new research tools after setback to better manage risk

By Kenneth Lim

Boston, March 27 - Convertible fund manager Froley Revy Investment Co. Inc. has halved its investment team, all from the outright side, and put greater emphasis on proprietary quantitative tools to better balance its outright risk exposure, the firm said.

Froley Revy, which has focused on convertibles since its founding in 1975, currently has five investment professionals and two support staff, from the 10 investment professionals and two support staff it had previously. All the employees who left were from the outright side, said Froley Revy president, chief executive and institutional portfolio manager Andrea Revy O'Connell.

The firm's current outright portfolio managers - Ravi Malik, Mike Opre, Warren Chun and O'Connell - all began their careers at Froley Revy and have worked as a team for almost 10 years. Michael Revy runs the firm's alternatives portfolio.

"In May 2006, our discretionary accounts had underperformance relative to the most common convertible benchmarks," O'Connell said in a statement. "Since then, we have been proactive in taking steps to rectify the shortfall."

A detailed analysis by the firm showed that "we increased risk in order to capture the great returns of the year's first three months, but failed to decrease that risk before markets pulled back in May," O'Connell said.

"Since our clients generally invest in convertibles as a low-risk way of owning higher risk stocks, it does not make sense to have a higher-than-market risk level," O'Connell said. "Therefore, we began our mission to identify and own the names that are most convex and that offer the best upside potential per unit of risk. These conclusions motivated us to further emphasize our quantitative research analytics that we have been testing over the past few years with excellent results. We believe that by enhancing our fundamental research process with this convexity optimized model, we maximize our ability to enhance your risk/reward payoff."

Froley Revy's new tools help the firm to select convertibles with high convexity, where there is only a small difference between the conversion premium and the premium to investment value. That means investors in those issues will pay less for an option on the upside with limited downside risk, O'Connell explained.

"Given these changes to our process and our need to tighten our business model, we made the decision to reduce our analyst team," O'Connell said. "As the convexity model recalibrates our focus within the convertible universe, our portfolio managers employ our proprietary fundamental analysis to more thoroughly vet opportunities as they arise in either the credit or equity segments of convertible securities."

O'Connell said the new process appears promising.

"I haven't seen anybody else doing what we're doing," O'Connell said. "It's definitely not been used that I know of. It basically tries to grab the index return better but at a lower risk...Now we're taking safer, bigger names."

Taking a more conservative approach now also appears to be prudent, O'Connell said.

"We're seeing more worries in the market with what's going on with subprime mortgage and oil and gas concerns," O'Connell said. "I'm just worried, and the market just keeps going higher in my face, but I'm just worried that we're going to get a credit event."

Froley Revy plans to launch a new product in May that will take advantage of the new tools, O'Connell said.

"We're looking at more alternative strategies," she said. "We have an alpha product; it's something like a half-step between outright and hedge products. The numbers come out very interesting. We're looking to add value over the convertible index with that product with less of the risk."

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