Although FCVSX owns 153 securities, their top ten holdings represent more than 36% of the fund's assets. Since the fund's top five holdings are about 25% of the fund's assets, let's examine these top five securities.

No. 1 holding (7.62% of total portfolio): El Paso Energy (EP) $49.90 convertible preferred stock El Paso Corporation is a large, broadly based natural gas company. But, El Paso's $49.90 Convertible Preferred Stock is just that, a stock, not a bond. It is not principal protected in any way, and offers very little downside protection. Trading at $1,603.96, the preferred stock has a low conversion premium of 4.98% and a delta of 90.63. In other words, analysts predict it will participate in almost all of the ups and downs of the underlying EP stock. This convertible stock is rated junk (CCC) by Standard & Poor. Absolute return protection grade: F. Bond protection grade: F.

No. 2 holding (5.25% of total portfolio): Celanese Corp (CE) $1.063 Convertible Preferred Stock
Celanese Corporation engages in the production and sale of industrial chemicals. Again Celanese $1.063 convertible is a stock, not a bond. Like El Paso, it has a very low conversion premium and a high delta, meaning the future destiny of this preferred stock will mirror that of the common stock. Although, neither Standard & Poor nor Moody's rates this preferred stock, Value Line does rate it: as junk. Absolute return protection grade: F. Bond protection grade: F.

No. 3 holding (4.40% of total portfolio): Chesapeake Energy Corp. (CHK) 2.5% convertible bonds due May 15, 2037 Chesapeake Energy is one of the largest independent natural gas producers in the U.S. This convertible security is, in fact, an actual bond, currently selling at 148.11 or $1,481.10 per bond. It has a current yield of 1.69% and a conversion premium of 35.54%. It has a high delta of 84, thus it is expected to participate in much of the ups and downs of the underlying CHK stock. The next put and call are not until May 15, 2017, almost nine years away. If the stock does not go up and the bond gets called, the bond will lose $419.29 per bond, or 28.3% of its value. The put protection also only protects about 70% of the bond's value. The bond is rated junk (BB) by Standard & Poor. Absolute return protection grade: D. Bond protection grade: D.

No. 4 holding (3.98% of total portfolio): Freeport-McMoran Copper & Gold (FCX) 6.75% convertible preferred mandatory convertible due May 1, 2010
Freeport-McMoran Copper & Gold is a large producer of copper and gold. This is a hybrid convertible security, not a bond. Like Fidelity's other top holdings, it too has a low conversion premium (5%) and a high delta of 89; therefore it should closely follow the gyrations of the underlying FCX stock. Mandatory convertibles have no principal protection. This hybrid security must be converted into FCX stock, at its future value, at maturity. It is rated junk (BB) by Standard & Poor. Absolute return protection grade: F.  Bond protection grade: F.

No. 5 holding (3.58% of total portfolio): Halliburton (HAL) 3.125% convertible bond due July 15, 2023
Halliburton is a large producer of products and services to the petroleum and energy industries. This convertible is selling for $258.919 or $2,589.19 per bond. At maturity on July 15, 2023, it is guaranteed to pay $1,000.00 per bond. Therefore, the bond has the potential to lose over 60% of its value should the underlying stock fall.  The bond is callable on July 15, 2008 at par, thus the convertible should rise or fall in lockstep with the common stock, HAL. This convertible also has puts on July 15, 2013 and 2018, but they offer virtually no principal protection since the put price is only par ($1,000 per bond). Of Fidelity Convertible's top five holdings, this is the only security rated investment grade (A) by Standard & Poor. Absolute return protection grade: D-. Bond protection grade: D-.

Based on the above holdings of the Fidelity Convertible Security Fund, it is no wonder that it followed the equity performance record of the bear market of 2000-2002. An investment in the fund on March 10, 2000, incurred a loss of 32.88% by October 2002. And, it took investors almost 5 years (56.8 months to be exact) to get their money back that they invested in the fund.

Investors and their advisors considering convertible bond funds as part of their bond allocations would do well to find out what the underlying strategy is. Not all convertible bond funds are created equal, and some are really equity-type funds thinly disguised as convertible securities. Funds like the Fidelity Convertible Security Fund often have good track records, but they may be "high risk" (as Morningstar aptly classifies the Fidelity Convertible fund). Many offer little or no bond protection nor achieve absolute returns.

    Notes:  All holdings of Fidelity Convertible Securities Fund are according to http://moneycentral.msn.com at 3/31/08. All pricing of convertibles, unless otherwise indicated, were obtained from Kynex on June 2, 2008. Returns of Fidelity Convertible Security Fund are through 5/31/08. The grades for absolute return protection and bond protection represent the opinion of Wellesley Investment Advisors, Inc.

Greg Miller, CPA, and Darlene Murphy, CPA, founded Wellesley Investment Advisors Inc., Wellesley, Mass., in 1991. The firm specializes in managing convertible securities for individual portfolios as well as for other advisors. They launched the Miller Convertible Fund (MCFAX) in December. For more information, contact him at (781) 416-4000 or [email protected], or visit www.wellesleyinvestment.com.

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