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The Benefits of Convertible Funds

Flexibility is a key feature of convertible funds.

If you love driving convertibles-whether the top is up or down-you'll no doubt be interested in convertible funds.

Convertible securities come in the form of bonds or preferred stocks in which the holder (in this case, the portfolio manager) has the option to convert either form into the underlying common stock. "They give you the option of participating in the upside of the common stock," says Peter Luke, portfolio manager of the Smith Barney Convertible Fund (SCRAX). "On the other hand, should the common stock not do well, you're protected by the fixed-income value of the bond or the preferred's [dividend]." At the end of June, the top-performing Smith Barney Convertible Fund had about 82 securities in its portfolio, with the bulk of assets invested in health care, IT and financial holdings.

They may seem confusing, but convertibles typically give investors a conservative way to play the market. They're not perfect, but their unique style makes them worth exploring.


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Dian Vujovich is an author, syndicated columnist and publisher of fund-investing site

This story appears in the November 2004 issue of Entrepreneur. Subscribe »