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I have about 45% of my holdings in Canadian bonds with the intent that this stabilizes the total valuation even if I lose out on potential returns.

Should I include some convertible bonds in these holdings or are their equity-like features at odds with the goal of stability? If the answer is "yes", what proportion should they be of the total bonds?
 

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convertible bonds are often exchange-traded bonds. These are often unrated. There can be other negative features that can make these bonds fairly risky. Would you be able to provide an example of one or two that you have in mind.
 

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I have about 45% of my holdings in Canadian bonds with the intent that this stabilizes the total valuation even if I lose out on potential returns.

Should I include some convertible bonds in these holdings or are their equity-like features at odds with the goal of stability? If the answer is "yes", what proportion should they be of the total bonds?
I have about 5% of my fixed income component as convertible debentures. There was a period last year, around Sept / Oct. when a number of companies decided to raise money in the form of convertibles. It was a time when the market was rising quickly, and corporate spreads were still somewhat wide - so that a few attractive offerings were issue. Among the ones I picked up as new offerings were Crombie Reit, IBI Income, Primaris Reit, AG Growth and Calloway Reit. Because of the rising markets, a number of these are close to the conversion price, with a few already "in the money".

I wouldn't go overboard with convertibles, as most are not investment grade - but the conversion feature provides some upside if you think future market conditions are favourable.
 

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" ... most are not investment grade."

that's what i was getting at.

some of these REITs - calloway & primaris are examples - have high levels of debt, are in fact paying out more in distributions to their unit trusts than they are earning, ie they are utilizing debt to fund the distributions. One has to ask if this was the reason for their debt issues last fall. If so the operation suggests a giant complicated ponzi scheme.

in addition, it's worth noting that many of these unit trust exchange-traded debentures have language written into their prospectuses to the effect that, at maturity, they may redeem with additional trust units instead of with cash. In other words, the maturity date could trigger a further dilution of trust units instead of paying back capital to the debenture holders. I recall a suggestion from an analyst that if a unit trust does not have sufficient cash for full redemption on hand six months prior to the maturity of such a debenture, the debenture holder should either prepare himself for the unit issue or else he should bail.

furthermore, i have witnessed at least one analyst boasting about his relative security in holding the debentures of a unit trust rather than the units themselves, because - he said - the debentures were debt instruments that took priority in case of default. However, other - and wiser - analysts have pointed out that most of these exchange-traded debentures are unsecured debt, so they are worth very little more than the units, if indeed anything at all.

to verify all of these details - whether debt is repayable with additional units, whether debt is secured or unsecured - is a total pain. It's necessary to cruise SEDAR to find & read the prospectuses, and because SEDAR's documents are not sub-indexed it's necessary to know the date of issue of the wretched debenture.

lastly, one has to consider the illiquidity of these debentures. They barely trade. A whiff of trouble, and the bottom can fall out of their market.
 
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