Convertible Securities Portfolio
MacKay Shields manages active, balanced convertible portfolios. Our convertible investment approach offers an attractive alternative to investors who desire the downside protection inherent in bonds as well as the potential for capital appreciation from investing in equities.
At MacKay Shields, we combine a consistent investment process with the fundamental judgment of professionals. Our strategy seeks to achieve solid investment performance with below-average market risk while focusing on those convertible securities that we believe offer the best risk/reward profile.
We seek to maximize total return and to outperform the market and competition while managing downside risk.
Our bottom-up approach looks to identify the merits of convertibles relative to the underlying common stock. The combination of evaluating downside and upside potential for each convertible, in conjunction with our convertible valuation models and fundamental analysis of the underlying equity, is a unique feature of our convertible investment approach. We believe these elements of our convertible investment process add value over time and deliver investment performance that will help our clients meet their investment objectives.
The strategy utilizes full analysis of the capital structure to identify those securities that offer the best risk/reward trade-off for investment.
Our investment process is built upon quantitative disciplines, as well as highly disciplined fundamental, bottom-up analysis.
Quantitatively, the team uses a variety of resources to model convertible bond structures and performs sophisticated reward/risk horizon analysis on convertible securities. We seek to identify those convertible securities that our analysis suggests are expected to participate in approximately 60% to 80% of the underlying equity’s price appreciation, but only 30% to 50% of its downside.
Once the structure review is complete, fundamental research is conducted only on those companies exhibiting the asymmetric risk/reward characteristics inherent in balanced convertible securities. Our focus is centered on finding solid, sustainable core businesses, strong, experienced management teams, underleveraged balance sheets, cash flow generation that exceeds capital expenditures, and earnings that are projected to increase from present levels.
Finally, a review of the valuation of the underlying common stock is also conducted, and price targets are established. We seek to only invest in those companies that demonstrate an identifiable catalyst that is likely to spark appreciation of the security in the next six to 18 months. Only those securities that we believe exhibit the best risk/reward profile are purchased for client portfolios.
A strict sell discipline is key to managing risk. A security is sold when it trades at the high end of its historical valuation range and its fundamentals do not warrant a revaluation. A security will also be sold if its company fundamentals have materially changed for the worse or we believe the convertible no longer provides an attractive risk/reward trade-off.