INSIGHTS

April 2021

Prior to joining Tandem, I was part of a team that managed a convertible securities portfolio for both institutional and retail clients. The convertible asset class has produced an attractive risk/return profile over multiple business cycles and currently provides asset allocators with another vehicle to manage risk within a portfolio. For the past year, we have been operating in a historically low-rate environment driven by central bank action. But an improving economy means longer-term interest rates are expected to move up over time.

In order to combat interest-rate risk within our bond allocation, Tandem has recently added the Victory INCORE Investment Grade Convertible Securities Fund to its asset allocation. We have provided a basic overview of the asset class below.

Amy Bush
Amy Bush, CFA

Chief Investment Officer

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The bond portion of the convertible provides downside support in the form of a semi-annual coupon payment and a stated maturity date which acts as a theoretical “bond floor”. The equity call option provides potential capital growth through equity appreciation. Considered a convex security, on average, the price of a convertible rises at an increasing rate as its underling stock rises, but falls at a decreasing rate, as the underlying stock falls. It is this attribute that gives the asset class such an attractive return profile through total market cycles.

Some convertibles are different than others… convertibles generally fall into three broad categories after issuance, depending on the movement and direction of the underlying common stock. Equity-sensitive convertibles generally move with the underlying stock on a one for one basis. A credit-sensitive convertible security trades on its credit fundamentals while a total return convertible moves modestly with underlying stock price movement. Most are issued with a credit rating, either investment grade or below investment grade (junk), while others are not rated (NR).

Portfolio managers have the discretion to construct convertible portfolios based on a combination of convertible attributes, and in general, an active approach to convertible portfolio management is preferred over the use of a passive index ETF in order to manage the overall equity sensitivity of the portfolio.

Asset allocators may use convertibles to either cushion equity returns in a volatile market or to enhance fixed income returns in a low-rate environment.

Convertibles have historically performed particularly well in a rising interestrate environment when the economy is improving due to their low duration and sensitivity to common stocks.

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By replacing a portion of our bond exposure with convertibles through total market cycles, we may potentially improve the risk/return profile of the bond portion of the portfolio.

Disclosures:

Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC.

The information published herein is provided for informational purposes only and does not constitute an offer of investment advisory services. All information is subject to change without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. No investment process is free of risk, and investors may lose all their investments. Diversification and asset allocation do not ensure a profit or guarantee against loss. Past performance is not indicative of current or future performance and is not a guarantee. The opinions expressed in this video may not fit your risk and return preferences.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation of future events or conditions. Tandem does not assume any duty to update any of the information.

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The Certified Financial Planner™ and CFP® (collectively, the “CFP® marks”) are professional certification marks granted in the United States by Certified Financial Planner Board of Standards, Inc. (“CFP® Board”). The CFP® certification is a voluntary certification; no federal or state law or regulation requires financial planners to hold CFP® certification. The CFP® is recognized in the United States and a number of other countries for its (1) high standard of professional education; (2) stringent code of conduct and standards of practice; and (3) ethical requirements that govern professional engagements with clients. To earn the credential, each CFP® candidate must have a bachelor’s degree (or higher) from an accredited college or university and three years of full-time personal financial planning experience. In addition, candidates must take the CFP® Certification examination and complete a CFP® -board registered program or hold an accepted designation, degree, or license. Every two years, CFP® certificate holders must complete a minimum of 30 hours of continuing education. More information regarding the CFP® is available at http://www.cfp.net.

Chartered Financial

Analyst The Chartered Financial Analyst (CFA) charter is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute—the largest global association of investment professionals. There are currently more than 107,000 CFA charterholders working in 135 countries. To earn the CFA charter, candidates must: 1) pass three sequential, six-hour examinations; 2) have at least four years of qualified professional investment experience; 3) join CFA Institute as members; and 4) commit to abide by, and annually reaffirm, their adherence to the CFA Institute Code of Ethics and Standards of Professional Conduct.

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