How much experience does the manager have with managing convertible and high-yield securities?
Advent has been managing convertible securities since inception in 1995 (and the experience of the portfolio managers goes back well beyond that at their previous employers). Advent has managed high-yield securities opportunistically in their convertible strategies and manages a dedicated high-yield convertible strategy.
What evaluation process does Advent use when selecting convertible securities?
Advent looks at each convertible security in three ways: one, evaluating it with a convertible-pricing model, as a financial instrument with certain risk/reward characteristics and upside/downside potential, two, evaluating the credit, and three, evaluating the underlying common stock through fundamental research.
Why a Leveraged Fund?
Leveraged closed end funds offer investors the opportunity to purchase shares of a fund whose dividend yields generally are designed to be higher than those of similar, unleveraged investments. At the same time, leverage introduces or heightens certain investment risks. As a result, understanding leverage, its benefits and risks, plays an important role in determining whether a leveraged Fund is the right investment. Leverage creates risks that may adversely affect the return for the holders of common shares, including: the likelihood of greater volatility of NAV and market price of the Fund’s common shares, fluctuations in the dividend rates, and possible increased operating costs, which may reduce the Fund’s total return.
How will the dividends from the AVK Fund be taxed?
We anticipate that the dividends paid by the Fund will be ordinary income to the shareholders. If the Fund has realized gains during a fiscal year, the Fund’s Board will determine if they will be distributed to shareholders.
What is Advent's investment process?
Convertible and High-Yield Securities Universe Screen - Advent uses three quantitative models to identify convertible and high-yield securities with what they believe are attractive risk/reward characteristics.
Credit Analysis - The creditworthiness of the security is reviewed, using five years of financial data (interest coverage ratios, debt to capitalization, and cash flows), and the last two years' quarterly statements. Advent is most interested in companies with stable to improving trends in financial ratios. This step is critical to reducing risk. Advent evaluates credits for all its holdings, while the credit committee evaluates credit on many corporate securities beyond those that just have convertibles outstanding, to give a complete look at an industry's status and outlook.
Fundamental Analysis - Each company is analyzed from a fundamental perspective, using company financial statements, industry data, and meeting with or speaking with management. Underlying equity fundamentals are examined to identify company and/or industry dynamics that could act as catalysts for favorable performance. These include accelerating earnings momentum, changing industry dynamics, new product announcements, or corporate developments like a restructuring. Because Advent is located in New York City, it has a distinct research advantage in being able to meet with company managements, who frequently visit the financial center for meetings, presentations, and conferences. In-house research reports are produced with an investment opinion.
Portfolio Monitoring - Advent continually monitors its portfolios to determine whether each holding is maintaining its investment potential.
What does the "Ex-Div" or the "Ex-Dividend" date refer to?
Every quarter the Fund pays dividends and those investors who purchase the Fund before the ex-dividend date will receive the next dividend distribution. Investors who purchase on or after the ex-dividend date will not receive the next dividend distribution. The value of the dividend is subtracted from the Fund's NAV on the ex-dividend date each quarter. So when the NAV is reported with an "ex-div" behind it, this means that the amount of the dividend has already been taken out of the NAV.
Describe the differences between closed-end and open-end funds?
An open-end fund may be purchased or sold at NAV, plus sales charge in some cases. An open-end fund will issue new shares when an investor wants to purchases shares in the fund and will sell assets to redeem shares when an investor wants to sell shares. When selling an open-end fund the price the seller receives is established at the close of the market when the NAV is calculated. Unlike the open-end fund, a closed-end fund has a limited number of shares outstanding and trades on an exchange at the market price based on supply and demand. An investor may purchase or sell shares at market price while the exchange is open. The common shares may trade at a discount or premium to the NAV.
What is the DRIP and how is its price determined?
DRIP is the Dividend Reinvestment Plan. The DRIP price is the cost per share for all participants in the reinvestment plan. The DRIP price is determined by one of two scenarios. One, if the Common Shares are trading at a discount, the DRIP price is the weighted average cost to purchase the Common Shares from the NYSE or elsewhere. Lastly, if the Common Shares are trading at a premium, the DRIP price is the determined either the higher of the NAV or approximately 95% of the Common Share price.
The Fund’s prospectus offers a more thorough discussion of the risks and considerations associated with an investment in the Fund. Such risks and considerations include, but are not limited to: Convertible Securities Risk, Equity Securities Risk, Lower-Grade Securities Risk, Options Risk, Synthetic Convertible Securities Risk, Call Risk, Illiquid Investments, Emerging Markets Risk, Currency Risks, Strategic Transactions, and Inflation Risk. There can be no assurance that a percentage of dividends paid on common shares, if any, will consist of qualifying dividend income. Please read the prospectus carefully before you invest or send money.
INVESTMENT TEAM
Portfolio Management
Tracy V. Maitland | President, Chief Investment Officer
Mr. Maitland serves as Chief Investment Officer of Advent Capital Management, LLC. Prior to founding Advent, Mr. Maitland was a Director in the Convertible Securities Department in the Capital Markets Division at Merrill Lynch. As the major distribution link for Merrill Lynch between investors and issuers, Mr. Maitland gained a unique perspective investing and trading in convertibles and equities. While at Merrill Lynch for 13 years, Mr. Maitland advised institutions on investing in convertibles, fixed income and equities. He is a graduate of Columbia University.
F. Barry Nelson, CFA | Senior Vice President, Portfolio Manager
Mr. Nelson serves as Senior Portfolio Manager. Prior to joining Advent, Mr. Nelson was Lead Manager of Value Line Convertible Fund and Value Line Multinational Fund, and Research Director of Value Line Convertibles Survey. Under Mr. Nelson's management, Value Line Convertible Fund rose to #1 among 41 convertible funds monitored by Lipper Analytical Services. The Value Line Convertibles Survey was cited as the top-performing investment letter by Hulbert Financial Digest. His earlier experience includes international research at NatWest Securities, Research Director of Louis Nicoud & Associates, and Portfolio Manager of Value Line U.S. Government Securities Fund, named the #1 U.S. Government Bond Fund by Money magazine after five years, and Portfolio Manager of Value Line Aggressive Income Trust, a high yield fund. Mr. Nelson is a graduate of New York University and St. John's University Business School.
Douglas Melancon, MD | Managing Director, Portfolio Manager
Dr. Melancon serves as an Associate Portfolio Manager for the AVK Closed-end fund. Prior to joining Advent, Dr. Melancon performed healthcare securities research and portfolio management for Merlin Biomed Group. Dr. Melancon was previously a Co-Portfolio Manager and senior healthcare analyst at Weiss, Peck and Greer. He began his investment career as a Sell Side biotech analyst at Merrill Lynch and Morgan Stanley, where he developed deep insights into corporate strategies and established key corporate contacts. He is known for his keen ability to distill medical innovation and assess its importance to companies. He received his Doctorate of Medicine from the University of Pennsylvania School of Medicine, and his MBA and BS in bioengineering from the University of Illinois, Urbana-Champaign.
AVK Investment Adviser
Advent Capital Management, LLC
1271 Avenue of the Americas, 45th Floor
New York, NY 10020
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http://www.adventcap.com/
RISKS AND OTHER CONSIDERATIONS
The Fund is a diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. Your common shares at any point in time may be worth less than you invested, even after taking into account the reinvestment of Fund dividends and distributions.
Investment and Market Discount Risk. An investment in the Fund’s common shares is subject to investment risk, including the possible loss of the entire amount that you invest. Your investment in common shares represents an indirect investment in the securities owned by the Fund, substantially all of which are traded on national securities exchanges or in the over-the-counter markets. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. Your common shares at any point in time may be worth less than what you invested, even after taking into account the reinvestment of Fund dividends and distributions. In addition, shares of closed-end management investment companies frequently trade at a discount from their net asset value. This risk may be greater for investors expecting to sell their shares of the Fund soon after completion of the public offering. The shares of the Fund were designed primarily for long-term investors, and investors in the common shares should not view the Fund as a vehicle for trading purposes.
Convertible Securities. The Fund is not limited in the percentage of its assets that may be invested in convertible securities. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, the convertible security’s market value tends to reflect the market price of the common stock of the issuing company when that stock price is greater than the convertible’s ‘‘conversion price.’’ The conversion price is defined as the predetermined price at which the convertible security could be exchanged for the associated stock. As the market price of the underlying common stock declines (other than in distressed situations), the price of the convertible security tends to be influenced more by the yield of the convertible security. Thus, it may not decline in price to the same extent as the underlying common stock. In the event of a liquidation of the issuing company, holders of convertible securities would generally be paid after the company’s creditors, but before the company’s common stockholders. Consequently, an issuer’s convertible securities generally entail more risk than its debt securities, but less risk than its common stock.
Synthetic Convertible Securities. The value of a synthetic convertible security will respond differently to market fluctuations than a convertible security because a synthetic convertible security is composed of two or more separate securities, each with its own market value. In addition, if the value of the underlying common stock or the level of the index involved in the convertible component falls below the exercise price of the warrant or option, the warrant or option may lose all value.
Lower Grade Securities. Investing in lower grade securities involves additional risks, including credit risk. Credit risk is the risk that one or more securities in the Fund’s portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the security experiences a decline in its financial status. The Fund may invest an unlimited portion of its Managed Assets in securities rated Ba/BB or lower at the time of investment or that are unrated but judged to be of comparable quality by the Advisor. These securities may become the subject of bankruptcy proceedings or otherwise subsequently default as to the repayment of principal and/or payment of interest or be downgraded to ratings in the lower rating categories (Ca or lower by Moody’s or CC or lower by Standard & Poor’s). Securities rated BB or Ba or lower are commonly referred to as ‘‘junk bonds.’’ The value of these securities is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. Issuers of lower grade securities are not perceived to be as strong financially as those with higher credit ratings, so the securities are usually considered speculative investments. These issuers are generally more vulnerable to financial setbacks and recession than more creditworthy issuers which may impair their ability to make interest and principal payments. Lower grade securities tend to be less liquid than higher grade securities.
Leverage Risk. Although the use of leverage by the Fund may create an opportunity for increased return for the common shares, it also results in additional risks and can magnify the effect of any losses. If the income and gains earned on securities purchased with leverage proceeds are greater than the cost of the leverage, the common shares’ return will be greater than if leverage had not been used. Conversely, if the income or gains from the securities purchased with such proceeds does not cover the cost of leverage, the return to the common shares will be less than if leverage had not been used. There is no assurance that a leveraging strategy will be successful. Leverage involves risks and special considerations for common shareholders including: • the likelihood of greater volatility of net asset value and market price of the common shares than a comparable portfolio without leverage; • the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any Preferred Shares that the Fund may pay will reduce the return to the common shareholders or will result in fluctuations in the dividends paid on the common shares; • the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares; and • when the Fund uses financial leverage, the investment advisory fee payable to the Advisor and the servicing fee payable to the Servicing Agent will be higher than if the Fund did not use leverage. The Advisor, in its judgment, nevertheless may determine to continue to use leverage if it expects that the benefits to the Fund’s shareholders of maintaining the leveraged position will outweigh the current reduced return. Certain types of leverage may result in the Fund being subject to covenants relating to asset coverage and Fund composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for the Preferred Shares or other leverage securities issued by the Fund. These guidelines may impose asset coverage or Fund composition requirements that are more stringent than those imposed by the Investment Company Act of 1940, as amended (the ‘‘Investment Company Act’’). The Advisor does not believe that these covenants or guidelines will impede it from managing the Fund’s portfolio in accordance with the Fund’s investment objective and policies.
Interest Rate Risk. In addition to the risks discussed above, convertible securities and non-convertible income securities are subject to certain risks, including: • if interest rates go up, the value of convertible securities and non-convertible income securities in the Fund’s portfolio generally will decline; • during periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known as call or prepayment risk. Lower grade securities have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem a lower grade security if the issuer can refinance the security at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer; and • during periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected principal payments. This may lock in a below market interest rate, increase the security’s duration (the estimated period until the security is paid in full) and reduce the value of the security. This is known as extension risk.
Illiquid Investments. The Fund may invest without limit in illiquid securities. The Fund may also invest without limit in Rule 144A Securities. Although many of the Rule 144A Securities in which the Fund invests may be, in the view of the Advisor, liquid, if qualified institutional buyers are unwilling to purchase these Rule 144A Securities, they may become illiquid. Illiquid securities may be difficult to dispose of at a fair price at the times when the Fund believes it is desirable to do so. The market price of illiquid securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for or recovers upon the sale of illiquid securities. Illiquid securities are also more difficult to value and the Advisor’s judgment may play a greater role in the valuation process. Investment of the Fund’s assets in illiquid securities may restrict the Fund’s ability to take advantage of market opportunities. The risks associated with illiquid securities may be particularly acute in situations in which the Fund’s operations require cash and could result in the Fund borrowing to meet its short-term needs or incurring losses on the sale of illiquid securities.
Foreign Securities. Investments in non-U.S. issuers may involve unique risks compared to investing in securities of U.S. issuers. These risks are more pronounced to the extent that the Fund invests a significant portion of its non-U.S investments in one region or in the securities of emerging market issuers. These risks may include: • less information about non-U.S. issuers or markets may be available due to less rigorous disclosure or accounting standards or regulatory practices; • many non-U.S. markets are smaller, less liquid and more volatile. In a changing market, the Advisor may not be able to sell the Fund’s portfolio securities at times, in amounts and at prices it considers desirable; • an adverse effect of currency exchange rates or controls on the value of the Fund’s investments; • the economies of non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; • economic, political and social developments may adversely affect the securities markets; and • withholding and other non-U.S. taxes may decrease the Fund’s return.
Currency Risks. The value of the securities denominated or quoted in foreign currencies may be adversely affected by fluctuations in the relative currency exchange rates and by exchange control regulations. The Fund’s investment performance may be negatively affected by a devaluation of a currency in which the Fund’s investments are denominated or quoted. Further, the Fund’s investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities denominated or quoted in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.
Management Risk. The Advisor’s judgment about the attractiveness, relative value or potential appreciation of a particular sector, security or investment strategy may prove to be incorrect. Although certain members of the investment team at the Advisor have experience managing high yield debt securities, the Advisor, as an entity, has limited experience managing such securities. In addition, the Advisor has not previously served as investment advisor to a registered investment company, and the Servicing Agent is a relatively recent entrant into the field of servicing closed-end investment companies, although the principals of the Servicing Agent have experience servicing regulated investment companies and providing packaged products to advisors and their clients.
Strategic Transactions. The Fund may use various other investment management techniques that also involve certain risks and special considerations, including engaging in hedging and risk management transactions, including interest rate and foreign currency transactions, options, futures, swaps, caps, floors, and collars and other derivatives transactions. These strategic transactions will not be made for speculative purposes but will be entered into to seek to manage the risks of the Fund’s portfolio of securities, but may have the effect of limiting the gains from favorable market movements.
Common Stock Risk. While common stock has historically generated higher average total returns than convertible securities and non-convertible income securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.
Market Disruption Risk. The terrorist attacks in the U.S. on September 11, 2001 had a disruptive effect on the securities markets. The war in Iraq also has resulted in recent market volatility and may have long-term effects on the U.S. and worldwide financial markets and may cause further economic uncertainties in the U.S. and worldwide. The Fund cannot predict the effects of the war or similar events in the future on the U.S. economy and securities markets.
Anti-Takeover Provisions. The Fund’s Agreement and Declaration of Trust includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status. These provisions could deprive the holders of common shares of opportunities to sell their common shares at a premium over the then current market price of the common shares or at net asset value. In addition, if the Fund issues Preferred Shares, the holders of the Preferred Shares will have voting rights that could deprive holders of common shares of such opportunities.
Risks of Investing in AMPS. There also risks associated with investing in Auction Market Preferred Shares or AMPS. The AMPS are redeemable, in whole or in part, at the option of the Fund on any dividend payment date for the AMPS, and will be subject to mandatory redemption in certain circumstances. The AMPS will not be listed on an exchange. You may only buy or sell AMPS through an order placed at an auction with or through a broker-dealer that has entered into an agreement with the auction agent and the Fund or in a secondary market maintained by certain broker-dealers. These broker-dealers are not required to maintain this market, and it may not provide you with liquidity.
The AMPS market continues to remain illiquid as auctions for nearly all AMPS continue to fail. A failed auction is not a default, nor does it require the redemption of a fund’s auction-rate preferred shares. Provisions in the Fund’s offering documents provide a mechanism to set a maximum rate in the event of a failed auction, and, thus, investors will continue to be entitled to receive payment for holding these AMPS.