| Greg Miller |
Darlene Murphy and Greg Miller of Wellesley Investment Advisors have been pushing their limited risk investing strategy for more than a decade. Institutional investors and high-net worth individuals are finally catching on; the co-principals and co-founders of the Massachusetts-based registered investment advisory have a solid track record: they’ve had annualized returns of 11% for the last 10 years. The firm manages more than $300 million through active subadvisors, pension profit-sharing plans and nonprofits, among others. Investments range from the minimum of $200,000 to $50 million. Murphy and Miller spoke with InstitutionalInvestor.com’s Kate McGregor about why their strategy works and what convertible products they’re invested in. This is an excerpt from their conversation. InstitutionalInvestor.com: How does a limited risk investing strategy differ from absolute return investing?
| Darlene Murphy |
Darlene Murphy: Our focus has been on maintaining and protecting principle first and what happens when you focus on that rather than trying to achieve relative return and beat the market all the time. You end up protecting principle but you can also end up with some very good results.
Greg Miller: One of the differences between limited risk investing and absolute return investing is absolute return is trying to make a certain benchmark year in and year out. We’re trying to achieve certain result over a five-year periods over market cycles. We’re trying to have no down year, but on top of that respectable returns over market cycles.
II.com: What does a typical portfolio look like?
GM: Our number one investment product that we specialize in is the convertible bonds. We use convertible bonds in an absolute return strategy. We don’t do convertible arbitrage and we don’t convertible bonds in a relative return strategy like most mutual funds. We use convertible bonds in more of a principle protected type strategy.
We [also] create synthetic convertible products. For the last couple of years, we’ve liked Berskshire Hathaway as a company, Johnson & Johnson as a company. We’ve liked Corning Glass. For example on Johnson & Johnson a couple of weeks ago we went to [Wachovia] and created a synthetic convertible where we get most of the upside of Johnson & Johnson stock. We also get a 2% yield on it every year. If the J&J stock falls, Wachovia guarantees the principle so our clients don’t loose any money.
We underwrite synthetic convertible products and principle protected products with firms like Wachovia and Merrill Lynch to create effectively principle-protected equities.
DM: Our typical portfolio is around 70% publicly-traded convertible bonds that we’re really using as principle protected equity and then the other 30% is other limited risk investments, such as synthetic convertible bonds. We also do index and equity linked securities.
II.com: You also manage a hedge fund. Can you talk about your strategy?
DM: Our hedge fund has a similar, but slightly different strategy. Beyond that our attorney’s have instructed us not to comment publicly about our hedge fund.
GM: It’s a non-registered hedge fund limited only to accredited investors.
II.com: How do you feel about the current market?
GM: We don’t really look at whether we think the market is going to go up or down. Our strategy – our convertible bond composite – over the past 11 years that we’ve been tracking has not had a down year. We always stay fully invested and we don’t care if the market goes up or down. Our goal is to continue to have those positive returns. We’re not really market-timers in any sense at all.
DM: ... Part of our strategy includes focusing very intently in reducing draw-down in our portfolio, which we try to keep to a minimum, and also standard deviation, which we keep very tight.
II.com: Earlier you mentioned Berkshire Hathaway, Johnson & Johnson. Are you eyeing any other companies right now?
GM: Those three we actually created synthetic convertibles. The first, Berkshire Hathaway, we created a synthetic convertible that guaranteed any downside with Merrill Lynch. It was an offering that Merrill Lynch had that we created with [the firm] and our firm bought the entire offering. Other companies that we like right now – again we buy the convertible version – we like Teva Pharmaceuticals. We’ve had their convertibles for a few years and they came out with two new convertible bonds that we like. We like EDF [Energy][which] has a convertible bond at 3.875% convertible bond due in July 2023. We like International Game Technology that are 0% and due in 1/29/33. Another one we like is Medtronic... Today, convertible bonds are long-term calls, but the holder of the bond has a short-term put where [investors] can get their liquidity, or get their return back after one, three or five years. That’s basically how in the last few years convertibles have been structured.
II.com: Thanks so much; it was great speaking with you.