Vanguard Gives Fund a Makeover

Converting a Winner

Vanguard Gives Convertible Securities Flexibility

On December 20, Vanguard announced that it was sprucing up its Convertible Securities fund for the New Year, increasing its ability to forage overseas and adding a duo of co-managers to the fund to help oversee the fund’s new foreign holdings. In addition, the fund will now be benchmarked against a global index standard.

Until this change, Convertible Securities was benchmarked to the Bank of America (BoA) Merrill Lynch (ML) All U.S. Convertibles Index, which is a market-capitalization-weighted index of domestic corporate convertible securities (high-yield securities that act something like a stockA financial instrument giving the holder a proportion of the ownership and earnings of a company., but pay dividendsA cash payment to investors who own stock in the company. more like bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.). Going forward, the fund’s new benchmark will be a 70%/30% mix of the BoA ML All U.S. Convertibles Index and the BoA ML Global 300 Convertible ex-U.S. Index. In addition, the fund’s former 20% restriction on international holdings has been lifted (at the end of November, Convertible Securities had only 3.0% allocated overseas, which will certainly go up in the coming months).

The fund’s two new managers are Jean-Paul Jacques Nedelec and Abe Ofer, both long-term members of Oaktree Capital Management’s team, having come aboard at the firm’s founding in 1995. They join Convertible Securities’ veteran manager, Larry Keele, who has managed the fund since the end of 1996. Keele will be managing the domestic portion of the portfolio, while Nedelec and Ofer will be responsible for the fund’s international holdings.

Nedelec was born in Paris and educated in France before attending San Diego State University in 1981. He has worked for Manufacturers Hanover Ltd. and Dai Ichi Kangyo Bank in London, as well as AXA Group in Paris. He joined TrustA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process. Company of the West in 1994 and operates out of Oaktree’s New York offices, co-managing the international convertible investments of the group.

Ofer got his start in investment management in 1984 with Trust Company of the West, where he worked his way up from an equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. research analyst specializing in technology, to a credit analyst in TCW’s High YieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. and Convertible Securities department. In 1989, he began to manage investments in “busted” convertible portfolios. He is a Managing Director at Oaktree. Ofer earned his BA in Mathematics from Reed College and an MBA in Accounting and Finance from the University of Chicago.

The increased international exposure adds an interesting new element to Convertible Securities, but should not be a cause for concern for investors. Keele, Nedelec and Ofer are all experienced convertibles traders, and incorporating a greater emphasis on overseas investments makes sense, as emerging and developing economies begin to account for more of the world’s markets.

We’ve found that Convertible Securities’ best use is in an income-focused portfolio where higher yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. and lower riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. are more important than absolute tax efficiency and performance. But it has very specific uses in a portfolio and is not necessarily the best choice for most investors.

Happy Holidays!

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