Convertible

Philosophy

The MacKay Shields Convertible product provides participation in the equity markets while emphasizing downside protection.  We combine a disciplined investment process with the fundamental judgment of seasoned professionals.  Our overall strategy is designed to provide competitive performance with below-average market risk while focusing on those convertible securities that offer the best risk/reward profile.

Discipline

We identify convertibles that offer an asymmetric risk return profile, focusing on the convertible’s upside potential by finding candidates with a Delta typically between 40-80%.  Staying within this Delta range affords us the best opportunity for total return with significant downside protection and upside participation.  We will typically avoid purchasing busted and deep-in-the-money convertible bonds.  We also utilize a convertible valuation model, which is a bond and option valuation model that determines the theoretical value of the convertible instrument based on the price movement of the underlying common stock. 

Once the quantitative steps have been completed, we begin fundamental research only on those companies exhibiting the characteristics that we believe lead to outperformance such as above average earnings growth and acceleration, attractive price/earnings ratios relative to the market, peers and the company's growth rate, and positive cash flow and free cash flow multiples.  We draw from the firm's expertise within MacKay Shields' other investment divisions.  We must be able to find several proven "catalysts" (e.g. Share repurchase, restructuring, etc...) that give us the confidence that the stock price will appreciate sooner rather than later before we can buy the convertible.

The sell decision process is disciplined.  When a security trades at the high end of its historical valuation range, all assumptions are reassessed.  If the earnings estimates are not revised higher and the fundamentals do not warrant a revaluation, the security is sold.  Additionally, if the convertible no longer has an attractive risk/reward tradeoff, the security is sold.  Diversification is a key risk control mechanism.