F. Barry Nelson looks back on more than 40 years on Wall Street, his faith in convertibles undimmed

By Rebecca Melvin

New York, Feb. 1 - F. Barry Nelson, who committed himself almost exclusively to investing in convertible bonds midway through his Wall Street career, retires this week after more than 40 years on the Street and 17 years with Advent Capital Management LLC.

He was most recently senior vice president, and a co-portfolio manager, at Advent, a firm he joined in 1996, shortly after its inception with less than $50 million in convertibles under management. Now Advent has more than $6 billion in funds under management, although at this point it is not exclusively in convertibles.

The erudite portfolio manager has quite a track record with Advent's Phoenix Convertible Income Strategy, which Barry co-managed with Advent founder, CEO and CIO Tracy V. Maitland since it was introduced in October of 1996, and since then, until the end of 2012, the strategy has had a gross return of 9% annualized, ahead of the major indices, while offering low volatility, and with only two down years out of 17, which were in 2008 and 2011.

Of 2011, Barry says, "It was heartbreaking to suffer a down year when we were so close to being in the black; we made it back by January 2012. But when things go wrong late in the year, it's difficult, and in the end we were down only 1.7% for the year."

Barry determined that convertibles were the "Holy Grail" in money management about 1993.

"They are compelling. There are extreme things that happen," he said. And a key reason that convertibles work so well, he believes, is that they lower downside risk and they are confusing.

"They are chronically a niche product. It isn't used much by major pension funds and not practical for individuals. They are anomalous," he said.

Investment strategy

The Phoenix income strategy seeks high yields and capital gains by investing in a portfolio of "theoretically cheap" convertibles that trade within 20% of bond value. Such convertibles have often experienced a decline in market price due to temporary concerns, while fundamental credit strength remained intact. Often, the underlying stock is undervalued, Advent's website says.

Typically the strategy involves buying convertibles within 20% of their bond value, riding them up to about 30% beyond their bond value, and then selling and reinvesting the proceeds at no more than 20%.

"It's been hugely successful," Barry said. "It's like an old-fashioned auto jack; the jack only lets you lift the car. Then the ratchet is reestablished as downside protection when you sell and reinvest. It's a discipline, and it overcomes one's natural emotions that tend to get carried away with winners."

One of those winners was Bank of America Corp.'s 7.25% series L convertible preferreds, priced in January 2008 at $1,000 each, when interest rates were substantially higher than they are now.

As of Monday, the Bank of America preferred was at $1,195 with a premium 420%.

"It's a fixed income instrument now," Barry said of the convertible.

He has ridden it up, and down. When it priced it looked very balanced, but swooned later in the year, and by February 2009 traded at $325 and even lower.

"That yielded 22%," he said at its lows, noting that the security is soft-call protected, meaning that the underlying stock has to rise to $65 before the convertible can be called.

"BofA will have to offer some sort of sweetener if they want to call these," he said.

Meanwhile, during the last five years, the stock, which doesn't pay a dividend, is down 71% from $40 to about $11.50. But holders of the convertible in the same period collected $362 in dividends, and with the price at $1,195, that means they have made 55%.

Barry's career also included tenure at Value Line as portfolio manager of the Value Line Convertible Fund and the Value Line Multinational Fund. And before that he spent 11 years as a journalist, a soldier and as a letter carrier, which are aspects about the psychology undergraduate major that he likes to remind others about himself.

Barry didn't start out as a "convertibles geek," he said. Originally, he was interested in advertising and was briefly a copy writer, before he got interested in computers and started to write for Datamation magazine.

But the year was 1968, and "it was a wild bull market. Anything to do with computers, and everything else went straight up. There were IPOs and people driving Ferraris. If anything, it was crazier than the dot-com bubble," he said.

He was an analyst trainee at Value Line, where the chief executive and founder, the late Arnold Bernhard, was a big believer in convertibles.

"If you were following a company that had a convertible, Bernhard said you had to discuss it in the report if it was an alternative to the stock," Barry said.

He was mildly intrigued but didn't immediately pursue convertibles with the single-minded focus that was to dominate his way of managing money later. He described the "multiple directions" taken, including global equities, being head of fixed income, being involved in junk bonds, government securities and even warrants.

"It struck me that with my background in the global equities and fixed income, high yield and government securities and involvement in warrants, I could bring it together and become a convertibles geek," he said.

So in 1996 shortly after Tracy V. Maitland founded Advent with its money management vision of focusing on convertible securities, it was a natural fit.

"I went to Advent in anticipation of the success of Tracy Maitland, who is a bold visionary, and who correctly saw the opportunity to create a successful money management firm with a focus on convertible securities. He had previously been head of convertible sales at Merrill Lynch," Barry said.

Ups and downs

Looking back, Barry has seen some dramatic cycles. Most recently, of course, the market got killed in 2008 and lost 36%. The market capitalization of convertibles shrank during the 2008 crisis to a mere $189 billion by February 2009, a level not seen since 2000, and after being as large as $345 billion in 2007.

"When banks tightened credit for funds and called on them to put up more assets, hedge funds had to sell to raise cash," he said.

Recovery occurred in 2009 and 2010, but then the convertible market size slipped back down to where it is today at just over $200 billion, according to estimates.

At a turning point

Despite the market's shrinkage, Barry's faith in the asset class has not diminished.

He believes in the idea of playing an eventual stock market rebound and getting a steady yield while you wait.

"We're not yet seeing speculation or leverage, which can be so dangerous, but it's overdue for interest rates to start rising, and it's overdue for companies to spend more, and it's overdue for IPOs, including new issues of convertibles," he said.

"It takes a long time for euphorias to come back. It requires a new generation to make the same blunders of the past. But it doesn't take a lot of time for optimism for growth prospects to return. Optimism popped in 2008," he said.

"We were excessively leveraged in 2008, and despite low interest rates now, leverage remains more constrained. The willingness of speculators to speculate has been reduced. But we are on a trend toward growth again," he said.

At Advent, Barry says, we went through collapses and crises. There was Enron, Sunbeam, and more. But pointing to the record of the Phoenix convertible income strategy, he said, "There have been no defaults going back to 1996. We've never held any securities that defaulted. We were generally never in them, or long gone before the default."

That's a good record to be able to point to as one plans to spend the rest of this winter in Florida, and next year, take one's boat to Florida as well.

This is Barry's plan. He will enjoy more freedom with his wife Kathy, who retired from an electronic consulting firm in December. And he will spend more time with his elder son Barry C., who lives in New York with his wife and small daughter, and more time with his younger son, James, who lives in Florida with his wife, and who is an avid sailor.

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