"Beware: Things may not be as they appear." This is not a tagline for a Stephen King movie, Broadway play, or even a reality television show. It's not exactly what you would expect to see in a mutual fund prospectus, but perhaps it should be.

The convertible security market in the United States is about a third of a trillion dollars. Through May 31, 2008, $47.55 billion in new convertible issues have come to market in 71 new deals. Convertible bonds constitute the largest component of the convertible security market by far, with the remainder being primarily convertible preferred stocks and other hybrid convertible securities. Convertible bond funds are one convenient way for investors and their advisors to access these securities.

When investors consider convertible funds, they have many goals in mind. The operative word for many investors and their advisors might be "bond."  Think of "bonds" and naturally the focus is on safety, security, stability, and income.

Others pondering convertible bond funds might think of principal protection or absolute return: some upside, but with the safety and security of bonds, perhaps.

Look closely, however. Things may not be as they appear.

Many of today's convertible bond mutual funds are neither true bond funds, nor absolute return focused.  Consider the goal of absolute return: positive returns through both bull and bear markets. Most convertible bond funds have not accomplished this.

Through the end of 2007, there were 21 convertible bond managers listed in Morningstar. 20 of the 21 convertible managers lost money in at least one year of the 2000-2002 bear market.  During the last bear market, 19% of the convertible fund managers lost money for at least one year of the 3-year bear market; 37% lost money for two years; and an astounding 44% lost money in all three years of the bear market. Down years in bear markets hardly evidences an absolute return focus.

Likewise, many convertible funds are not bond funds, either. Read the prospectus and you will often find that these funds invest in "convertible securities" - and a fund must be at least 80% invested in convertible securities to be called a convertible fund.

What may not be clear to investors and their advisers is that "convertible securities" can include convertible preferred stocks and hybrid convertible securities that offer no principal protection. Additionally, the convertible bonds that are among the holdings may be so "deep in the money" that they may rise and fall dramatically, in tight correlation with the underlying stock. Not exactly what might be expected for a bond allocation.

Look at one fund in particular, Fidelity Convertible Securities Fund (FCVSX), to see how a convertible fund can really be an equity fund in disguise. To the credit of the manager, FCVSX has admirable one-, three-, five- and ten-year performance returns. But, is this a fund that operates as a bond fund or with an absolute return focus?  Let's look more closely at the individual securities this convertible fund invests in.