Salomon analyst: convertible returns "boring but preferable" to stocks

By Ronda Fears

Nashville, March 4 - Convertible returns last month were flat, not very exciting, but Salomon Smith Barney convertible analyst Adrian Miller noted the asset class held up well against sharp declines in stocks.

"While casual observers may conclude convertible's February result of -0.1% was nothing to get excited about, one would only need to look at the broad equity market indices to conclude the asset class performed quite well,' Miller said in a report.

For the month, he said, the underlying stocks of the convertible universe posted a capitalization-weighted decline of 3.2%, while the S&P 500 was down 1.5% and the Wilshire 5000 dropped 1.9%.

"As we have seen in the past, the convertible market's resilience can be traced to the strength in the bond market," Miller said.

In February, he said, high-grade bonds returned 1.4%, high-yield 1.2% and 10-year Treasury bonds 2.7%.

With continued weakness in the underlying stocks, however, Miller noted the convertible market's average delta sank farther. At Feb. 28, the market's weighted average delta was 39.7%, down from last month's 40.8%.

The weighted average conversion premium pushed out to 94.5% from 90.2%.

As was the case in January when the equity markets sold off and both the high grade and high yield bond markets performed well, convertibles posted relatively sold results.

Mandatory convertibles continued their weak trend as investors remained focused on cash-pay and zero coupon bonds, the analyst said. Mandatories declined 3.17% in February while cash coupons gained 0.61% and zeros were up 0.35%.

Thanks to a rebound in the lower quality tech and telecom groups, non-investment grade converts posted positive results while others lost ground in February. Non-investment grade converts gained 0.56% while not rated converts lost 1.19% and high grades were down 0.26%.

As a result of continued strength in the previously downtrodden telecom and tech sectors, these two convertible market heavyweights were some of the best performing groups during the month, Miller said.

Communication equipment and services gained 1.22% and techs were up 0.35%. The biggest declines were seen in capital goods, down 3.23%, and utilities, down 2.92%.

The best performing convertible in February was XM Satellite Radio's 8.25% preferred due 2012, up 126.2% with the stock up 2.6%. XM Satellite's 7.75% due 2006 also was among the top 20 convertible performers.

Other top convertible returns were seen in both Lucent preferreds, the Nortel bond and mandatory, and Mirant's 2.5% due 2021.

The worst performing convertible last month was Fleming's 5.25% due 2009, losing 36.1% with the stock down 42.7%.

Other poor convertible returns were seen in both Duke Energy mandatories, the Aegon 4.75% due 2004 and the Charles River Labs 3.5% due 2022.

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