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Dear Mr. Berko:

Dear E.W.:

Give your broker a bottle of 20-year-old scotch, a gold star and a gift card for Morton’s Steak House and send her husband a dozen golf balls. I think Fidelity’s Convertible Bond Fund (FCVSX-$23.23) is a supercalifragilistic no-load fund for a long-term, IRA investment. This year, the Dow Jones industrials and the Standard & Poor’s 500 are both in double-digit declines, but FCVSX is down only 7.2 percent. And though the Dow and the S&P 500 have 20-year annual returns slightly above 10 percent, FCVSX has an average annual 20-year total return of 12.3 percent. In other words, FCVSX has bested both the Dow and the S&P by better than 20 percent. Convertibles are hybrid securities that incorporate both bond and equity features. Because the investor has the option of exchanging these securities for shares of the underlying common stock at a preset price, the value of that option and the convertible itself increases as the stock price climbs. However, if the underlying stock declines in price, the interest rate on the convertible (bonds or preferred stock) acts as a cushion and moderates the loss. I’ve always liked convertibles, because they give investors the best of both worlds: some of the upside potential of its underlying common stock plus some of the income and safety of a corporate bond.

However, it’s important to note that the convertible market is rather small. There are about $305 billion worth of these hybrid issues running around compared with the $5.6 trillion in equity securities outstanding and $7.7 trillion of mortgage-backed securities.

Moreover, there’s little research information available to the public on these issues, and convertible issues are difficult for investors to follow, because few reporting sources publish their daily price changes. So when you ask the average broker you might not get an answer, because he or she probably thinks a convertible is a Mercedes, a Corvette or a Porsche.

If you want to be knowledgeable on the subject, I recommend that you consider a subscription to The Value Line Convertible Survey. It’s a swell compendium of hundreds of different issues, updated every two weeks, and provides an enormous amount of current and important data along with Value Line’s recommendations.

The Fidelity Convertible Fund has been managed during the past three years by Tom Soviero. He’s an aggressive manager and favors more equity-sensitive convertibles over the middle-ground issues. His $3.3 billion portfolio is more concentrated than those of his rivals at Vanguard, Franklin or T. Rowe Price, so he’s willing to make large sector bets. His bet on the energy and materials sectors – 43 percent compared to 10 percent in the index – was responsible for recent gains. But as energy prices began to crash, FCVSX got hammered hard, and Soviero had his worst month ever, losing almost 9 percent in July.

Still, I think your broker made a swell choice. I’m keen as mustard on this fund and have owned it since 1995.