The theory behind the
Dunham Appreciation & Income Fund (DNAIX) is that by allocating half the portfolio to convertible bonds and preferred stocks and the other half to common stock, investors will experience a smoother long-term ride.
The $45 million fund, which was launched in December 2004, gained 16.2% last year, ranking it 12th among 77 funds in the convertible category as tracked by Morningstar Inc. of Chicago.
The category's average gain was 8.1%; the Standard & Poor's 500 stock index gained 3.6% over the same period. The fund has a four-star rating from Morningstar.
So far this year, the strategy has hit a rough patch, despite some gems inside the portfolio.
Through Thursday, the fund was down 6.9% for the year, while the category average lost just 1.4% and the S&P was down 3.6%.
"Historically, the fund has done very well in terms of insulating investors from down markets," said Jeffrey Dunham, chairman and chief executive of Dunham & Associates Investment Counsel Inc.
The San Diego-based firm has more $1 billion under management in 10 mutual funds, all of which are charged a performance fee that can adjust from 0.35% to 0.95%, depending on how well each fund performs.
The performance fee is calculated on a rolling 12-month period.
The fund, which is subadvised by Naperville, Ill.-based Calamos Asset Management Inc., essentially applies a large-cap growth strategy with a kicker supplied by an allocation to convertible bonds and preferred stocks.
"We're not interested in just holding fixed income," Mr. Dunham said. "Each bond in the fund is convertible to an underlying stock."
The appeal of owning convertibles, he explained, is that as a stock rises, the bond can be converted into common shares.
The downside protection comes from collecting coupon payments on the bond, according to Mr. Dunham.
Of the 70 positions in the fund, 30 are currently represented by convertible bonds.
"In building this portfolio, the managers are looking for stories that have some catalyst for change to make them believe a company's earnings will grow faster than the Street estimates," he said.
Preferred stocks are used, Mr. Dunham explained, because they represent a higher seniority than common stock, giving them an advantage in the event of a company's liquidation.
One of the fund's top 10 holdings — Beaverton, Ore.-based Nike Inc. (NKE) — might seem like an unlikely candidate for having slipped past the watchful eyes of Wall Street, but it has been among the stronger performers in the portfolio.
The stock closed Friday at $68.37 per share, up 6.8% so far this year. In 2007, the stock was up 33.4%.
The story largely boils down to globalization with a particular emphasis on a booming Chinese economy, Mr. Dunham said.
Over the 12-month period through the end of March, Nike rang up $1 billion worth of sales in China, second only to the United States, which accounted for $6 billion in sales over the same period.
Driving Nike's performance in China is a fast-growing middle class, including 16 million Chinese between the ages of 15 and 39 with an income of at least $5,000 a year.
The target market segment is expected to reach 160 million over the next 10 years, contributing to Nike's anticipated 30% annual sales growth rate in China over the next several years, Mr. Dunham said.
"Nike is already selling in 300 cities in China and that's likely to grow to 500 cities in the next two years," he said.
Houston-based Transocean Inc. (RIG) is another example of where the fund has hit pay dirt.
Transocean reinforced its position as the world's largest offshore drilling company through the July acquisition of Houston-based Global Santa Fe Corp. The firm now holds a 20% share of the world's operating offshore rigs.
"This company will continue to benefit from rising interest in deep-water drilling," Mr. Dunham said.
The Transocean-Global Santa Fe deal was described by some analysts as a near-perfect merger of equals, with ownership of the new company divided among shareholders, who received a $15 billion distribution.
"The $15 billion cash payment allows us to achieve a more appropriate capital structure and deliver immediate value to our combined shareholders," Global Santa Fe president and chief executive Jon Marshall said in July.
Transocean's stock, which closed Friday at $150.19, has gained 5% since the start of the year. In 2007, the stock was up 84.6%.
Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].
