The heightened volatility is probably why Tilray’s convertible notes carry a 5 percent interest rate, which is rather high for a convertible security. Five of the Franklin fund’s 10 largest holdings have a coupon of less than 1 percent, for instance. That’s the trade-off for owning the option to convert to equity if the share price rises — if it falls instead, you’re left with debt that pays much less interest than a typical bond for a few years.
The outcome of the stocks-bonds battle will have a profound effect across financial markets. It’s also clearly one of the few things that could derail the Franklin fund. It hasn’t had a down year since 2011, boasting a 9.2 percent annualized return over the past five years, better than any of the other U.S. mutual funds with more than $1 billion in assets. It has almost kept pace with the S&P 500 itself.
Most fixed-income investors are having an interest-rate reckoning now. But for convertibles, the more significant consequence of rising yields is whether it causes a sustained stock-market sell-off. If equities can prevail through this latest turmoil, then Muschott and his team may very well sit atop the fund rankings once more at the end of the year.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
This column was provided by Bloomberg News.