Convertible bonds offer a way to enhance a traditional fixed income strategy or the potential to reduce exposure to volatile equity markets. Such a strategy can be used by investors of all risk profiles and is an ideal supplement for a core principal protected equity strategy for retirement income.
Using Convertible Bonds to Protect Portfolios and Increase Income
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Protecting Your Portfolio and
Increasing Income Through Steve Stanganelli, MSF, CFP®, CRPC®
Principal
Convertible Bonds Steve@ClearViewWealthAdvisors.com
Using Convertibles to Preserve
and Grow Wealth
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10. Convertible Correlation With Other Markets
Barclay's
S&P 500 TR Agg Bond BofA ML
Wellesley Index Index V0A0 Index
Wellesley 1
S&P 500 TR Index 0.52 1
Barclay's Agg
Bond Index 0.04 0.01 1
BofA ML V0A0
Index 0.78 0.67 0.01 1
Source: Morningstar, Inc.
10
11. Convertibles as an Asset Class
Who Should Invest in Convertible Bonds?
a) Bond holders seeking less exposure to Treasury bonds, municipal
bonds or ‘straight’ corporate bonds with greater potential upside
b) Investors wanting reduced equity exposure without giving up stock
market upside
c) Investors looking for a non-correlated asset class for more
diversification
d) Investors fearful of rising interest rates on ‘straight’ fixed income
products
11
12. Historical Bear Markets: DJIA
Year Number of Bear Markets Percent Decline
1900s 3 46%, 49%, 27%
1910s 3 24%, 40%, 47%
1920s 1 89%
1930s 3 23%, 49%, 41%
1940s 1 24%
1950s 1 19%, S&P 500 fell 22%
1960s 3 27%, 26%, 36%
1970s 2 45%, 27%
1980s 2 24%, 36%
1990s 1 21%
2000s 2 38%, 53%
All numbers are approximate.
All percent declines are declines in the Dow Jones Industrial Average. 12
15. Home Run Example: Home Depot
Historical Example: Home Depot
What Happens When the Stock Appreciates
Convertible Stock
Bond Stock
300% 303.64%
November 25, 1996 $995.00 $51.88
Purchased Home Depot Per bond before split Convertible
3.25% convertible bond 250%
$17.29 Bond
Due 10/1/01 –
Convertible to 43.402
after 3:2 and 200% 211.96%
2:1 splits
shares HD
150%
October 1, 1999 $3,011.95 $69.79
Sold Home Depot Per bond Including 100%
convertible bond dividends of
Callable 10/2/99 $0.23
50%
GAIN (LOSS) 202.71% 303.64%
0%
Interest Income 9.25%
It should not be assumed that recommendations made in the future will be profitable
or will equal the performance of the securities listed. All numbers are approximate.
15
16. Strike Out Example: AOL Time Warner
Historical Example: AOL Time Warner
What Happens When the Stock Depreciates
Convertible 20.00% Convertible
Bond Stock
Bond
November 30, 2000 $501.25 $40.61 10.00% Stock
Purchased AOL 0% Per share
9.47%
Per bond 0.00%
convertible bond
- 47.16%
Due 12/6/2019 –
Convertible to 5.834 -10.00%
shares of AOL
(Put on 12/6/2004 at -20.00%
$639.76 per bond)
-30.00%
March 28, 2002 $548.75 $23.65
Sold AOL 0% Per share
convertible bond
Per bond -40.00%
-50.00%
GAIN (LOSS) 9.47% - 47.16%
It should not be assumed that recommendations made in the future will be profitable
or will equal the performance of the securities listed. All numbers are approximate.
16
17. Wellesley’s Three Laws
Wellesley Investment Advisors
Three Laws of Convertible Investing for
Absolute Return / Limited Risk Investing
1. Invest in long convertibles.
Goal is to maximize returns & protect principal over periods of 7 years.
2. Buy converts that have no (or minimal) loss to the next ‘liquidity event.’
A liquidity event is the next call, put or maturity.
3. Buy converts with short-term liquidity events.
A short-term liquidity event is a put or maturity of 7 years or less.
17
18. Performance Record
Year WIA S&P 500 MLV0A0
1995 20.05% 37.58% 24.75%
1996 10.15% 22.96% 14.30%
1997 22.92% 33.36% 18.98%
1998 16.56% 28.58% 8.21%
1999 19.60% 21.04% 44.32%
2000 17.32% -9.10% -11.70%
2001 11.74% -11.93% -3.95%
2002 3.08% -22.06% -4.95%
2003 15.28% 28.68% 25.80%
2004 6.58% 10.88% 8.49%
2005 3.60% 4.91% -0.34%
2006 9.57% 15.80% 12.75%
2007 7.33% 5.49% 4.12%
2008 -11.09% -37.00% -33.02%
2009 36. 58% 26.46% 47.19%
2010 0.12% -6.65% -0.34%
Annualized 11.72% 7.29% 8.11%
Annualized returns are from January 1995 to June 30, 2010. Please see performance notes in appendix.
The BoA / ML V0A0 represents the US Convertible Market excluding mandatory convertibles.
All numbers are approximate. 18
19. Performance Record
Wellesley S&P 500 BOA/ML
Convertibles Total Return V0A0
15 Years 11.32% 6.24% 7.34%
10 Years 7.83% -1.59% 2.30%
Returns through June 2010
Sources: BoA / V0A0 is the US Convertible Index. The S&P 500 Index is designed to be a leading indicator of US Equities.
Please see performance notes in appendix All numbers are approximate.
21. WIA Investment Strategy
What Makes Wellesley Different From Other
Convertible Managers
1. Wellesley only invests in convertible bonds
2. Wellesley only invests in bonds with short-term maturities or puts
3. Wellesley focuses on absolute returns
4. Wellesley can be a core principal protected equity strategy
5. Wellesley can be an enhanced fixed income replacement strategy
6. Wellesley’s convertible bond strategy has never had a default
• Weighted Average Credit Quality: BBB / BBB-
21
24. Growth of $1,000,000 : January 1995 – March 2010
Performance Record
Growth of $1,000,000 : January 1995 – June 2010
7,000,000
6,000,000
WIA:$5,572,662
Total WIA
5,000,000 Advantage
over
4,000,000
S&P 500 TR:
3,000,000 87.04%
2,000,000
ML V0A0: $3,350,630
1,000,000 S&P 500: $2,979,356
0
Sources: BoA / ML V0A0 is the Bank of America / Merrill Lynch V0A0 US Convertible Index.
Please see performance notes in appendix.
All numbers are approximate.
24
30. About Steve Stanganelli, CFP®, CRPC®
Chief Personal Portfolio Strategist & Money Coach
Steve Stanganelli, MSF, CFP®, CRPC® (978) 388-0020 or (617) 398-7494
Steve@ClearViewWealthAdvisors.com
Steve Stanganelli is a five-star rated, board-certified financial planning professional who has over 20 years of experience coaching individuals
and businesses on ways to improve and protect their personal or business bottom line.
Steve has worked with numerous individuals and businesses as a mortgage banker, business owner, business finance consultant and now as a
CERTIFIED FINANCIAL PLANNER ™ Professional.
His practice encompasses retirement income planning, investment management, divorce settlement analysis and college funding strategies. He
is a published author and regularly presents on these topics to businesses, civic groups and community organizations.
Steve works with a variety of individuals and families with a special focus on Baby Boomer pre-retirees, business owners, corporate executives
and medical professionals.
Steve earned his Master of Science degree in Finance (MSF) from Bentley College with high distinction. He is also an honors graduate of the
University of Massachusetts – Lowell.
Steve holds the designations of CERTIFIED FINANCIAL PLANNER ™ and CHARTERED RETIREMENT PLANNING COUNSELOR ™ awarded after
completion of extensive, in-depth studying and exam requirements.
Steve is an executive officer of the Greater Merrimack Valley Estate Planning Council. Steve, formerly of Methuen, is a resident of Amesbury
where he lives with his wife, Kristin, a Registered Dietitian, and their infant son, Spencer. He is an avid competitive cyclist.
31. About Clear View Wealth Advisors & The Tool Kit for Money
Clear View Wealth Advisors, LLC is a fee-only state-registered investment adviser.
The firm provides personalized financial planning advice on a broad range of topics with an
emphasis on retirement income planning, self-directed IRA strategies, college funding and
financial aid strategies, and divorce planning and settlement analysis.
Money management tools are available including customized investment programs for
individuals.
We offer a tool kit for money and help people make smarter money moves for life.
Clear View: Who We Serve
We work with individuals or couples in need of trusted guidance while going through transitions
like a job change, retirement, divorce or other life-changing event.
We strive to make our services accessible to busy professionals and their growing families to
assist with retirement planning, elder care or college funding issues.
32. Wellesley Investment Advisors - Footnotes
Footnotes for WIA Convertible Bond Returns
1. This presentation reflects only the convertible bond portion of WIA's client accounts. Returns are based on all convertible
bond positions held in accounts of all WIA clients during the periods reflected. Actual client accounts include positions other
than convertible bond positions. Such other positions are not included in this performance presentation. Accordingly, the
actual return of WIA client accounts is different, in some cases substantially, from the performance information presented for
convertible bonds. During the periods reflected, WIA did not manage any other accounts that included convertible bonds in
their portfolios.
2. Returns include a 0.00% annual management fee. WIA's standard fee schedule is included in its Form ADV Part II.
3. Past performance is not indicative of future results.
4. No representation is made that the investor will obtain similar results to those shown above. The performance presented
may not be representative of investments held in any one client account or performance realized in any one client account. An
investor's actual performance may differ from the performance presented above due to timing of investment, contributions and
withdrawals. Performance does not reflect the effects of taxation, which result in lower returns to taxable investors.
5. This report is meant for broad discussion purposes only, and is not intended as a recommendation to buy or sell any security.
6. An investment in convertible bonds involves a risk of loss. The value of an investment in convertible bonds may decrease as
well as increase.
7. WIA's convertible returns have been calculated using the methodology set forth below. Such methodology includes several
assumptions that result from systems limitations on aggregating the convertible bond portion of multiple client accounts.
Although information has been obtained from and is based on sources WIA believes to be reliable, WIA does not guarantee the
accuracy of the information, and it may be incomplete or condensed. Returns do not reflect reinvestment of interest and
dividend income.
33. Wellesley Investment Advisors
8. Methodology for WIA Convertible Bond Returns:
(a) Listed the market value of all convertible bonds held on the last day of each month.
(b) Determined the weight of each bond holding in the portfolio (individual bond value / total bond value).
(c) Determined each bond's return for the month (monthly interest earned plus / minus monthly price change).
(d) Assumed that a bond entered the portfolio on the first day of the month in which it was first purchased.
(e) When a bond is completely sold out of the portfolio, its prior month end value is adjusted to reflect the final sales price.
(f) Weighted each bond's return for the month by the bond's weight in the portfolio.
(g) Summed each bond's weighted return for the month to get the portfolio's return for the month.
(h) Compounded monthly returns to calculate annual return.
Other Footnotes
- A complete market cycle is defined either by a top-bottom-top or bottom-top-bottom pattern in the stock market. In the WIA
analysis, the S&P 500 was used to define the market cycle of the stock market.
- Bond & Average Credit Quality reflects the higher of the ratings of Standard & Poor’s Corporation, Moody’s Investors
Service, Inc., and Fitch. If a bond is not rated by any of these organizations, Wellesley Investment Advisors uses their
proprietary credit rating system to demonstrate the credit quality of convertible bonds. Ratings are relative, subjective and not
absolute standards of quality.
- Alpha statistics provided by Morningstar, Inc. as of June 30, 2010.