Bottom Line: Convertible risks

PETER RINTOUL, the Grahams Rintoul investment trust manager newly installed at Lazard Investors, made a confession yesterday. His firm badly timed the launch, four years ago, of the North American Gas Investment Trust. Nagit, which aimed to capitalise on the expected end of an oversupply of gas, performed abysmally for the first three years of its life, but has gone like a train in recent months.

The right time to have bought into the trust was when no one would have invested, Mr Rintoul observed. Does the same logic apply to the Lazard High Income Trust, launched yesterday?

Like others, Lazard is seeking to meet the need of investors who can no longer get a decent income from their building society. It will invest in convertibles to provide an initial gross yield of 8 per cent. This compares very favourably with the 3.93 per cent yield on the FTA All-Share index.

The convertibles of most FT-SE 100 stocks are offering 6-7 per cent. To make up the difference, Lazard will invest a sizeable chunk of its portfolio in the high-yielding convertibles of troubled companies where there is a prospect of a re-rating. The trust will also borrow pounds 30 for every pounds 70 it raises from investors, taking advantage of interest rates below its expected portfolio yield.

Potential investors should be aware that this gearing, and the need to invest in riskier convertibles, increases the dangers. But the Lazard trust is less risky than ordinary shares in the Olim convertible trust and cheaper than the BZW convertible trust, where the shares trade at an 18 per cent premium to net asset value.

Nonetheless, convertibles have already performed very well over the past two years, helped by the increasing emphasis on yield. Recovery has already been largely discounted.