Educational Articles

Baron Retirement Income Fund Tests the Convertible Waters


Baron Retirement Income Fund's (BRIFX) first-quarter report to shareholders notes three convertible positions that manager Ron Baron recently initiated.  In the report, he notes that he "saw an unusual opportunity develop in corporate debt."  The backdrop for that "unusual" opportunity was the fact that many investors, particularly hedge funds, were "dumping debt" at "fire sale" prices.  This, he believed, presented the opportunity for equity-like returns with lower risk.

As is typical with Baron funds, Ron Baron stuck with what he knew, choosing to invest in just three convertibles issued by companies about which his firm knew a great deal.

His investment in Lamar Advertising Company (LAMR) turned out quite well, as the outdoor advertising company tendered for Baron's stake at 92.  That was just a few months after the manager had purchased the convertible bonds in the mid 70s.  The 2.5% convertible note isn't particularly well ranked by Value Line's Convertible Survey (you must be a subscriber to The Value Line Convertible Survey to see our research on convertible securities), but it is still traded.  Note, however, that Baron no longer has a position in this convertible.

A position in Penske Automotive's (PAG) 3.5% convertible note due 2026 proved equally as rewarding, as the company's tender for some of the issue led to an advance from Baron's purchase in the mid 50s to the current price in the high 80s to low 90s.  Value Line doesn't believe that the quick ascent has diminished the potential for this convertible, however, as it still is accorded a high rank by Value Line's Convertible Survey.  As the second largest auto retailer in the United States (it also has material overseas operations), selling both new and used cars, Penske has certainly been hurt by the falloff in that industry's sales.  Last year, particularly the fourth quarter, proved very challenging.  Value Line equity analyst Garrett Sussman expects this year to be a difficult one, as well. That said, management has implemented cost controls to combat the weakness, including layoffs and the consolidation of dealerships.  It has also eliminated its common share dividend.  Despite a high debt burden, the company doesn't appear to be on the ropes, so the convertible might be an interesting way to receive an income stream while waiting for the auto industry, and this equity, to come back.  Assuming that the share price increases, the convertible will benefit, too.

Central European Media's (CETV) 3.5% convertible note, meanwhile, has also been a boon to Baron Retirement Income Fund's performance, increasing in price from the low 30s purchase price to the recent value in the 60s.  This company invests in, develops, and operates commercial television channels in central and eastern Europe.  Some of its television channels are TV2 and Ring TV in Bulgaria; Nova TV in Croatia; TV Nova, Nova Sport, and Nova Cinema in the Czech Republic; PRO TV, Acasa, PRO Cinema, Sport.Ro, and MTV Romania in Romania; TV Markiza in the Slovak Republic; POP TV and KanalAin Slovenia; and Studio 1+1, Kino, and Citi in the Ukraine.  This is not exactly a risk-free investment strategy, however, TimeWarner recently purchased a 31% stake in the company-suggesting that the business has some potential.  A fact that investors took note of, pushing the convertibles price up as noted above.  That said, the note is still highly ranked by The Value Line Convertible Survey, so it may be an interesting option for those seeking a stake in the media space in central and eastern Europe.

In the end, this foray into convertibles is an example of Baron's approach to investing.  He is a long-term shareholder who is both willing to wait and buy more of something he believes in, even if a company's share price has fallen.  His convictions come from in-depth research performed by his own team of analysts.  This type of opportunistic purchase is one of the reasons why Baron is highly regarded on Wall Street.