Q: I have owned CVD for a while and while it has shown decent results, I am in the unfortunate position of being unsure why I bought it! If I understand the product, a series of bonds (duration unknown to me) would rise faster than a similar bond fund without the conversion features if equity markets rose. I, therefore, assume that in declining equity markets, the fund would decrease less than the underlying equities because the bond provides a "floor" to some extent.
When the conversion price is reached does the fund buy the equity and keep it or does it sell it on the market and use the proceeds to buy more bonds?
If my understanding is correct would you not be better off buying pure equities if you expect the markets to rise and a pure bond bond if you think markets are going to decline? So I am left with the question: "What is the value proposition of a convertible bond fund?"
Appreciate your insight.
Paul F.
When the conversion price is reached does the fund buy the equity and keep it or does it sell it on the market and use the proceeds to buy more bonds?
If my understanding is correct would you not be better off buying pure equities if you expect the markets to rise and a pure bond bond if you think markets are going to decline? So I am left with the question: "What is the value proposition of a convertible bond fund?"
Appreciate your insight.
Paul F.
5i Research Answer:
We think your understanding here catches a lot of the key points. Convertibles are on the higher...