Convertible securities enjoyed a record year in 1999 as assets invested in them increased 52% to $20.268 billion in Pensions & Investments' annual survey of the money managers.
Most of that -- $20.233 billion -- was managed by only 25 managers. In addition, $4.8 billion of the $6.9 billion increase in assets from the $13.3 billion reported at year-end 1998 came from three firms -- Froley Revy Investment Co Inc., Los Angeles, up $1.7 billion, or 131%; Calamos Asset Management Inc., Naperville, Ill., up $1.1 billion, or 191%; and Putnam Investments Inc., Boston, up $924 million, or 413%.
Loomis Sayles & Co., Boston, held on to the top spot with $2.97 billion in U.S. institutional tax-exempt assets invested in convertibles, up 8% from $2.74 billion in 1998. Froley Revy, with $2.93 billion, and Calamos, with $1.74 billion, moved into second and third place, respectively.
"Not only was it the best year in terms of performance, but also in terms of the growth of the market," said Anand S. Iyer, global head of convertible research at Morgan Stanley Dean Witter, New York.
Overall, $41.2 billion in new convertible issues were raised in 1999, which is up from $29.9 billion in 1998, according to ConvertBond.com, a website created by MSDW that is dedicated to convertible bonds. The Morgan Stanley Broad Monthly Convertible index, meanwhile, returned 41.5% in 1999.
"When the emerging growth market does very well, this market tends to do very well," said Mr. Iyer.
Froley Revy was the firm that made the biggest move, in terms of money, in 1999, climbing from fourth place in last year's survey. "It was absolutely a knock-your-socks-off kind of year in terms of returns," said Andrea O'Connell, managing director at Froley Revy.
The firm's composite fund returned 57.9%, while the investment-grade fund returned 41.5%. These strong performers helped generate new business, she said. Ms. O'Connell said the bulk of the new accounts were from institutions looking to take their equity exposure down a notch and increase their fixed-income exposure. "They want to get that equity kicker. They were willing to give up some of the higher fixed-income coupon return in exchange for more equity participation," she said.
Calamos nearly tripled its assets in 1999. Climbing seven rungs on the P&I listing of the top 25 convertibles manager, it jumped to third on the list with $1.74 billion in assets, up from 10th place with $597 million in assets a year earlier.
The Calamos composite portfolio returned 40.9% in 1999, and that performance was one of the factors contributing to the firm's growth for the year ended Dec. 31, said John Calamos, president and chief investment officer. "The convertible universe tends to be more midcap than large megacap, so when the broad market does better, convertibles typically perform well."
Enhancement or asset class?
Perhaps because of the sluggish performance of the fixed-income market, Mr. Calamos said the most frequent use of convertibles among institutional investors is as an enhancement to their fixed-income portfolios. However, he sees some institutions using convertibles as a separate asset class. "It lets more conservative investors participate in the more volatile sections of the equity market," he said.
The trick to selecting and managing convertible securities, said Mr. Calamos, is determining the upside potential and downside protection of a given security. "In managing convertible portfolios you become a fixed-income manager on the downside, looking at creditworthiness and all the things that fixed-income managers look at; and on the upside, you become a good stock picker," he said.
Oaktree Capital Management, Los Angeles, placed fourth on the 1999 list with $1.7 billion in assets, dropping from second in 1998. TCW Asset Management, Los Angeles, remained in the fifth spot with $1.5 billion in assets.
INVESCO, Atlanta, placed sixth on this year's list with $1.2 billion in assets for 1999 after not making the top 25 for year-end 1998. Much of the boost came from the 1998 acquisition of New York-based Chancellor LGT, a firm specializing in convertible securities management. The firm brought about $1 billion in assets to INVESCO. Mike Witte, managing director at INVESCO, said it gained 20% in 1999 despite investing only in investment-grade convertibles. The 20% increase beat the Merrill Lynch Investment Grade Convertible index, which returned 11.6% in 1999.
Putnam Investments Inc., Boston, saw its convertible assets increase to $1.1 billion in 1999 -- from $224 million in 1998 -- to rank seventh.
A newcomer to the list, GEM Capital Management Inc., New York, placed eighth with $969 million in convertible assets, while Nicholas-Applegate Capital Management, San Diego, was ninth with $949 million. Rounding out the top 10 for 1999 was Capital Guardian Trust Co., Los Angeles, which saw its convertible assets drop slightly to $561 million from $606 million in 1998.
Palisades Capital Management LLC, Fort Lee, N.J., dropped to 15th in 1999 from sixth in 1998 as its assets decreased to $479 million in 1999 from $783 million in 1998. One of the reasons, said a Palisades spokeswoman, was that the firm lost a major client because it reclassified its assets as equity.
Whether convertibles can ride the momentum of the equity market and gain a larger piece of institutional investors' asset allocation pie remains to be seen. If it is the beginning of a trend toward convertible allocations, it would be a change from the past 15 years, when convertibles have had problems gaining attention from institutional investors, said Glenn Davis, consultant at Eager Manager Advisory Services, Louisville, Ky.
"Convertibles have been an enigma of an investment category," said Mr. Davis. "I think there's some question as to what their real role is. Is it a fixed-income security, is it an equity security, is it a blend," or is it a separate asset class, he added. Because of these questions, convertibles also have been difficult to model for plan sponsors and institutions in terms of making risk-return and correlation assumptions.
From a historical perspective, said Mr. Davis, convertibles didn't provide the defensive characteristics advertised during the 1987 market downturn. "When the big caps get a cold, convertibles have gotten the flu," said Mr. Davis. Then, when the markets started to recover, plan sponsors passed over convertibles in favor of other markets such as international, small-cap and emerging market equities, he said.