Convertibles rise 2.3% in October led by telecom, Salomon says

New York, Nov. 4 - The convertibles market rose 2.3% in October, led by gains in such telecommunications names as Lucent Technologies, Inc. and Nortel Networks Corp., according to analysts at Salomon Smith Barney.

However they pointed out that convertibles significantly underperformed their corresponding stocks, which posted a "robust" 8.3% return. They attributed the lag to the focus on large-capitalization names in the equity rally and convertibles' low delta.

And analysts Adrian Miller, Stuart Novick and Lynn Hambright also added that they stock gains are less positive than the headline numbers might indicate.

"As encouraging as October's returns were, the equity market's narrow performance breadth indicates caution," the analysts wrote in their review of the month.

Convertibles also saw narrow breadth; the geometric return was 34 basis points lowered than the capitalization-weighted figures at 2.0% versus 2.3%. Underlying stocks were 160 basis points weaker on a geometric basis at 6.7% versus 8.3%.

By sector, communications equipment and services was far ahead, according to the Salomon report. This group gained 10.68% in October - although it was still down 28.06% year to date by the end of the month.

The second best performer, technology, gained a far smaller 3.90% in the month and is now 14.96% lower year to date.

Trailing behind was utilities which lost 7.37% in the month and is now down 37.39% year to date, the worst of the 11 sectors into which Salomon divided the market.

The year-to-date best performer is transportation with a 0.01% loss after gaining 1.83% in October.

By security type, mandatories were the month's strongest performer, thanks to their higher deltas, according to Salomon. This group rose 3.33% in October compared to 2.58% for cash-coupon bonds, 2.23% for zero-coupon bonds and 1.11% for preferreds.

Compared to other asset classes, convertibles' 2.34% return in October beat the long bond, which lost 4.51% but lagged equity indexes including the Dow Jones Industrial Average with a 10.84% rise, the S&P 500 with an 8.79% gain, the Nasdaq composite, up 13.45%, and the Russell 2000, 3.10% higher.

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