FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
May 10, 2022

IN THIS ISSUE:

1. Bond Returns Beat Stocks Since 2000… Wow!

2. Bond Returns Outperform Stocks – Now What?

3. Convertible Bonds – Invest Like An Institution

4. Reintroducing Wellesley Investment Advisors

Introduction: Bonds Beat Stocks Over Last 20 Years

Our main topic of discussion today will be the fact that bond returns have beaten stock returns over the last 20+ years. This rarely happens and probably is not likely to continue. In fact, I believe the 40+ year bull market in bonds is OVER.

Furthermore, I believe traditional investments such as US Treasuries and corporate bonds should now be considered high risk, certainly if short-term interest rates continue to rise, which looks highly likely.

Following that discussion, I will reintroduce you to an alternative strategy for investing in bonds, which is an excellent choice in today’s ultra-low interest rate environment to traditional Treasury securities and corporate bonds, in my opinion.

This situation puts investors who use bonds to diversify their investment portfolios in a difficult spot, and many may risk overloading their portfolios in equities. Fortunately, I have a bond solution which you can take advantage of today and avoid the current high risks of traditional government and corporate bonds. That’s what we’ll talk about today.

Let’s begin by looking at the remarkable performance of traditional bonds which have delivered superior returns to stocks over the last 20+ years.

Bond Returns Outperform Stocks… Now What?

Historically, stocks have outperformed bonds and by a significant margin. Since 1928, stocks (Dow, S&P 500) have delivered average annual returns of 10.9%, according data from SPglobal.com, while bonds (Treasuries 10 years or shorter) produced average annual returns of 4.9%. per TreasuryDepartment data. Clearly, stocks have been the big winner.

Yet over the last 20 years, bonds have outperformed stocks. US Treasuries with maturities of 10 years or less delivered average annual returns of 8.3% whereas the S&P 500 produced average annual returns of just 5.4% over the same period. What a turnaround!

We have to keep in mind, of course, that US interest rates experienced a historic decline from 1980 when 10-year Treasury yields were near 16% to 2020 when they plunged to near 0%. Given the move of that magnitude, it’s no surprise stock returns couldn’t keep up.

Unless US interest rates are going into negative territory, as is the case in much of the world – which I don’t expect – stocks will likely go back to producing superior returns over bonds in the years just ahead. So, the outperformance for bonds is probably over and we will very likely go back to more normal performance patterns for the two asset classes going forward. In fact, this is already happening, as you can see in the chart below.

Of course, there’s no forgetting the fact that the stock market has been a scary roller-coaster over the last 20+ years. The S&P 500 declined:

49.2% from March 24, 2000, to October 9, 2002.
56.8% from October 9, 2007 to March 9, 2009.
33.9% in 5 weeks, from February 19 to March 23 this year.

After floggings like those, it’s a marvel that stocks have performed as well as they have over the last 20 years. Of course, the math of market losses is ugly: When you lose 50% of your money, it must double in value just to get back to where you started. Stock investors have had to endure that twice in the last two decades — before the coronavirus downturn — while the bond market has been comparatively steady.

The import of all of this is not that investors should load up on either bonds or on stocks. It is to hedge your bets and diversify: No one knows what the next 20 years will look like for the financial markets, or even the next few months. But how does one diversify when traditional bonds are so overvalued and high risk? I’ll tell you just below.

Convertible Bonds – Invest Like An Institution

Most individual investors have never invested in convertible bonds. Many have never even heard of convertible bonds. As a result, many investors have no idea how to invest in this asset class. Yet at Halbert Wealth Management, we offer what I consider one of the best professionally managed convertible bond programs I have ever seen.

With Treasury bonds and corporate bonds at very high-risk levels, in my opinion, I believe NOW is the time for all of my clients and readers to seriously consider diversifying into convertible bonds.

So, let’s take a closer look at convertible bonds, and I’ll tell you why I believe this.

A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond's life and is usually at the discretion of the bondholder.

Like regular corporate bonds, convertibles pay income to investors. But unlike traditional bonds, convertibles have the potential to rise in price if the company’s stock performs well. The reason for this is simple: Since the convertible bond contains the option to be converted into stock, the rising price of the underlying stock increases the value of the convertible security.

Of course, if the stock price of the underlying company goes down, there is no reason to convert the bond into shares of the company. In that case, you simply hold the bond to maturity and receive only your principal back plus any interest paid (less fees).

The main risk is if the underlying company defaults on its debt (bankruptcy) which can result in a loss on the investment. So, convertible bonds are not risk-free, but properly selected they can be an outstanding investment. This is why so many institutions invest in them. Let’s look at an example.

Suppose XYZ Company issues a five-year convertible bond with a $1,000 par value and a coupon rate of 5%. The “conversion ratio” – the number of shares the investor receives if they exercise the conversion option is 25. The effective conversion price is, therefore, $40 per share ($1,000 divided by 25).

Let’s say the investor holds on to the convertible bond for three years and receives $50 in income each year. Let’s also assume the stock has risen above the conversion price over that period and is trading at $60. The investor converts the bond and receives 25 shares of stock at $60 per share, for a total value of $1,500 or a 50% return over the three years.

In this way, the convertible bond offers both income and a chance to participate in the upside of the underlying stock.? This explains why convertible bonds are so attractive to institutions that know how to use them.

Lots of corporations issue convertible bonds to raise capital. The problem is, most investors don’t know which companies to invest in. This is why you want an experienced professional money manager making those decisions for you.

That’s where we come in. At Halbert Wealth Management, we researched the universe of convertible bond managers many years ago and identified what I consider to be one of the best professional convertible bond managers in the business, going back over 30 years.

Introducing Wellesley Investment Advisors

Wellesley Investment Advisors (WIA) is a Registered Investment Advisor located in Massachusetts that specializes in convertible bonds and has been doing so for over 30 years. Greg Miller, the founder and CEO of WIA, has been utilizing a conservative approach to investing in convertible bonds since 1991 and has an enviable performance record. See our FACT SHEET for specific actual performance details.

Greg’s son, Michael Miller, joined Wellesley over a decade ago and is now the firm’s President and Chief Investment Officer to carry on when, if ever, Greg decides to retire. The point is, with Michael and a team of seasoned professionals onboard, WIA is likely to be around for a long time to serve as our only recommended convertible bond manager.

Wellesley now manages over $3 billion in client assets, and Greg and Michael have the lion’s share of their net worth invested in the program. Of all the professional money managers we recommend at Halbert Wealth Management, I have my single largest personal investment with WIA.

Which brings me back to my main point today: You should be invested with Wellesley today as well. The story is compelling. Unless short-term US interest rates are going into negative territory – which I do not expect – the 40-year bull market in Treasury bonds is OVER, in my opinion. Short-term US interest rates have already started to rise, and I expect this trend to continue. This is bad news for Treasuries and corporate bonds as well.

If correct, this means investing in Treasuries and high-quality corporate bonds today is a high-risk proposition. Most investors know this and are understandably reluctant to invest in most bonds today. Yet bonds remain a preferred asset class for portfolio diversification.

But there is another way to diversify into bonds besides US Treasuries and traditional corporate bonds. That opportunity is in convertible bonds. Even if you have never invested in convertible bonds, I believe now is the time to seriously consider it. Let me reintroduce you to Wellesley Investment Advisors and show you how to take advantage of a bond strategy which is mostly invested in by institutional investors.

As noted above, Wellesley’s track record goes back over 30 years. Take a look at our FACT SHEET for specific actual performance details. I trust you will be impressed. I also trust you will see WIA is a proven way to replace the high-risk Treasury and corporate bonds you’ve traditionally invested in.

As always, there’s no guarantee WIA will continue to perform so well going forward. Past performance is no guarantee of future results. You know that, of course. Yet I believe Wellesley and convertible bonds are an excellent consideration for the bond allocation in your portfolio.

Even if you’ve never invested in convertible bonds before, now is the time to consider them, in my opinion. And Wellesley is the best overall convertible bond manager I have found, with decades of experience. Not only that, they are just good, dedicated people who I trust.

That means a LOT and explains in part why I have my largest personal investment with WIA. Why don’t you join me and take advantage of this alternative way to diversify in bonds – and avoid the high risks which now exist in Treasuries and traditional corporate bonds.

Call us today at 800-348-3601 and let us get you started. We’ll also answer any questions you may have, and we’ll send you the paperwork to open your account.

Wishing you profits,

Gary D. Halbert
President & CEO

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.