PORTFOLIO SPOTLIGHT
to 18 months has been companies coming to market with links to the ongoing buildout of artificial intelligence technology.“ That includes suppliers of memory or power,” he says.
“ Some of these can’ t issue debt because their business isn’ t profitable enough to pay a lot of interest, but they have some good things going,” he continues.“ And convertible investors realize these companies are early in their process of making money and see they have some exciting prospects, and they’ re happy to take a lower interest rate to participate in the upside.”
As Kramer put it in a recent report, AIadjacent companies issuing convertible securities offer investors a less-volatile way to move into this sector without buying volatile stocks.
In a fit of exuberance, Kramer offered that the convertibles market might be on the cusp of big things.“ I think now we’ ve entered a golden age of convertible bonds,” he wrote.“ We’ re seeing some really interesting deals come to the market.”
Asset Allocation
(% of portfolio)
Convertible Bonds 78.46 % Convertible Preferred Stock 12.61 % Equities 7.99 % Cash and Other Net Assets 0.72 % Bonds 0.22 %
Portfolio Statistics
Number Of Holdings 348 Average Mkt. Cap
$ 21.47 billion P / E Ratio 15.85x 12-Month Distribution Yield 2.86 % Std. Dev Fund / Benchmark 10.48 / 10.06 Turnover Ratio 89 % Net Expense Ratio 0.68 %
Performance and asset numbers as of 2 / 11 / 26. Holdings and portfolio stats as of 12 / 31 / 25. Standard deviation versus the ICE BofA All U. S. Convertibles Index as of 1 / 31 / 26. Distribution yield as of 2 / 10 / 26. Performance and expense ratio figures are for the institutional share class. Sources: Fidelity Investments and Morningstar
Convertible bonds often come with five-year maturities. And while they yield less than standard investment-grade corporate bonds, their shorter duration makes them less sensitive to interest rate changes than many other bonds.
Broad Reach
He notes that the convertibles market has a lot of turnover.“ It actually changes every three to four years,” he says in his interview.“ That means there’ s less reversion to the mean of total returns.”
Kramer says 14 % of convertible bonds currently in the market will mature by 2026, and roughly 20 % by 2027, creating demand for new issuance. He and Gandhi work with Fidelity’ s extensive network of equity and debt analysts who provide expertise on new companies coming to the convertible market.
“ As the complexion of the market changes, it really helps us to have analysts who cover different industries and have been covering these companies for a long time,” Gandhi says.“ So in the past couple of years we’ ve seen several new industries coming to market but our analysts have been covering their equity or debt for many years.
“ While those industries might be new to the convertible market, they’ re not new to us, and so we can get up to speed very quickly and start to establish where we think we see good risk-adjusted returns,” he adds.
Given the hybrid nature of convertible bonds, it’ s natural to assume that convertibles at times can capture both the best— and worst— of the equity and bond markets. Indeed, during 2020, as equities snapped back after the initial Covid-19 shock early that year, the Fidelity fund massively outshined U. S. equities( both the S & P 500 and Russell 2000 indexes). But it underperformed the Bloomberg Agg bond index by 237 basis points during the down year of 2022( even if it outperformed the S & P 500 on a relative basis by 280 basis points).
Kramer says his fund takes a flexible approach to managing risk. He notes that convertible bonds are a short-duration asset class with coupons that are relatively stable over full cycles.
“ It’ s all about managing that equity sensitivity,” he explains.“ There are periods of time when we want to be overweight that equity sensitivity and vice versa.”
He adds that when you look at the convertible market over multiple cycles, there’ s a range in its“ equity sensitivity,” or how much the bond price moves along with the stock( measured as a percentage of each dollar it moves). The benchmark index has ranged from 35 % as the cycle drops— such as in 2022— and as high as 65 % during the go-go year of 2021. Right now the convertible market is in the 50 % range( moving 50 cents for every dollar move).
“ Why the convertible market is interesting now is that it’ s right smack in the middle of trough and peak, and that’ s different from other asset classes out there,” Kramer says.
46 | FINANCIAL ADVISOR MAGAZINE | MARCH / APRIL 2026 WWW. FA-MAG. COM