Salomon adds three, removes three from recommended portfolio

By Ronda Fears

Nashville, Tenn., May 7 - Continuing a portfolio shift to more equity sensitive holdings in preparation for an expected rebound in the last half of 2002, Salomon Smith Barney convertible analyst Adrian Miller added three names this month to the firm's recommended convertible portfolio and removed three.

"As we have indicated over the past couple of months, we have slowly started to increase the portfolio's equity sensitivity in anticipation of an economic and corporate earnings rebound expected toward the latter half of the year," Miller said in a report Tuesday.

"Some of the changes were being done due to our call on a particular industry sector, some on the

prospects of a given company while others are due to the valuation characteristics of the convertible."

On May 1, Salomon removed from the recommended portfolio Aether Systems 6% due 2005, Cendant 3.875% due 2011 and Wendy's International convertible preferred.

Added were the new Temple-Inland 7.5% mandatory, Tower Automotive trust preferred and Vertex Pharmaceuticals 5% due 2007.

The process began in April with the removal of the Comcast 0% due 2020, Lucent 8% preferred, Mercury Interactive 4.75% due 2007, Nabi 6.5% due 2003 and ONI Systems 5% due 2005. At the same time, added were the new Merrill Lynch variable rate due 2032 and Williams Cos. 9% Feline PACS.

"From a sector rotation perspective, the convertible market benefited from renewed interest in groups like consumer cyclicals, financials, energy and healthcare," Miller said.

"As the economy has begun to improve and investors have stayed clear of the more fundamentally volatile sectors, the benefactors have been these economically sensitive sectors."

As the market's behavior continued its schizophrenic tendencies, convertibles lost whatever momentum they may have established with March's 3.2% return gain, Miller said. Instead, April saw convertibles post a loss of 1.4% while their underlying stocks sank more dramatically recording a 6.8% return loss.

"Despite the momentary performance setback, convertibles continue to outperform most of the major large-cap stock indexes," Miller noted.

The S&P 500 posted an April decline of 6.1% while the Nasdaq fell to the tune of 8.5%.

As a result of the convertible market's low average delta coupled with a strong bond market, the Salomon analyst noted convertibles are down 2.4% year-to-date, still excellent relative to the S&P 500 decline of 5.8%, the Nasdaq drop of 13.5% and the Russell 2000 decline of 4.4%.

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