Offers investors the potential for a consistent positive absolute rate of return with lower volatility relative to equities. Provides diversification benefits—the embedded downside protection enhances the risk/reward profile for traditional and alternative allocations—and offers potential to appreciate in rising interest rate environments. 

Focus: specialize in dynamically growing small- and mid-cap companies
Insights: invest in both equities and convertibles for a holistic view of company
Discipline: combine breadth of quantitative tools with traditional fundamental equity and credit analysis
Alignment: constrain capacity to add value and invest alongside clients
Experience: principals have been managing portfolios for over 30 years

November 1, 2002

Separately managed account

We believe that dynamic change often creates a disconnect between a company’s future earnings power and its stock’s valuation. Growth catalysts are often not fully understood and expectations tend to be adjusted upwards gradually. We seek to exploit this inefficiency by investing in dynamic companies exhibiting signals of change that will lead to an acceleration in revenue and/or earnings growth in which our research confirms the company’s growth is sustainable and its stock is a timely investment.

Our convertibles portfolios combine fundamental equity research with traditional credit analysis to identify those issues with an attractive asymmetrical risk/reward profile, those convertible securities that participate in most of the upside and less of the downside performance of the underlying equity.

Nicholas Convertible Arbitrage is an absolute return strategy that typically pairs a long convertible bond position with a corresponding short position on the underlying company’s equity. It uses an actively managed hedge strategy to seek a consistent positive rate of return with lower volatility than equities.

Portfolios are actively managed to continually drive to the strongest investment ideas. Position sizes are based on the conviction in the investment thesis of each company relative to other portfolio holdings and risk exposures. Early warnings signs that suggest deterioration in company fundamentals or earnings strength lead to timely sell decisions.

Risk analysis is essential to minimize uncertainties and enhance potential long-term gains for client portfolios. To understand intended and unintended sources of risk, our investment team leverages quantitative tools with experience, judgment and deep knowledge of the holdings within a portfolio on a daily, weekly and monthly basis.

Number of Positions          50–75
Geography                            US-listed public equities and convertible bonds
Net Exposure (expected)   40% to 50%
Gross Long Exposure         100% Max
Gross Short Exposure         50% Max
Delta Hedge per Position    +/-25%
Leverage                                None
Derivatives                            None

Bottom up, research-driven security selection that incorporates the coupon yield as well as the upside potential of each security’s embedded equity option. The short-interest rebate is an ancillary source of return. Industry and sector weights and factor exposures are a residual of the security-selection process.