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.