Published by Closed-End Fund Advisors, Inc.
September 2001, Volume I, Issue 5
George Cole Scott, Editor
Interview with Tom Dinsmore, Chairman,
Ellsworth & Bancroft Convertible Growth and Income Funds
Davis-Dinsmore is the management company for the two closed-end funds, Bancroft Growth & Income and Ellsworth Convertible Growth and Income Fund, located in Morristown, New Jersey. The funds are managed by Tom Dinsmore and his sister, Jane Dinsmore O'Keefe. Bancroft was formed in 1971 and Ellsworth in 1987. Each of the funds operates as a closed-end diversified management investment company which invests primarily in convertible securities with the objective of providing income and the potential of capital appreciation. The two funds consider these objectives to be relatively equal over the long-term, due to the nature of the securities in which they invest.
We talked to Tom Dinsmore twice. The first time was on September 21 right after the disaster at the World Trade Center and the Pentagon. We called him again on October 1 to focus more on his style of investing:
Scott: Tom, in an earlier conversation, you told me that the Boards of closed-end funds have responsibilities for pricing the portfolio. This is especially important since the events of September 11. Could you explain that to us?
Dinsmore: When there is a question about the pricing of the portfolio, it is the responsibility of the Board to do one of two things: They either price it for you by whatever means they can or approve of the methodology used by the management to get a price. You need to investigate whether your compliance manual has directions as to how you do pricing. Whenever there is a question about a fund's service providers or their custodian, this is something each Board member has to consider.
Most of our market makers were affected by this (event). Since so much of our business is done over-the-counter on trading desks, this is something, which concerns our Board. If a large percentage of our market makers are not willing to stand ready, willing and able to make markets, then it is a problem. Can I conduct business in a reasonable manner? Can I get accurate prices and quotes? Those are the concerns of the Board. I can tell you that anyone who does small-cap stocks can have a problem with an event like the recent airplane bombing. We have convertibles, and our convert desks are up and running. We usually are at the high quality end. If the convertible doesn't have that big a market cap, then the common will.
Scott: You are saying the small-cap people like Royce will have difficulty?
Dinsmore: Whenever you have a period like this, you tend to have a flight to quality even within the equity universe. The traders of these types of issues may or may not have problems with processing smaller orders because there will be focus on the bigger stuff. I think they will have a problem on the number of transactions rather than on the size of transactions.
Scott: What about the stock market?
Dinsmore: I think that the markets look good for the next three months unless we find we are in a protracted war. The question is who will we declare war against, and how do you do it? Closed-end funds certainly have the advantage over mutual funds in that we don't have redemptions.
Scott: What other issues do you think are important?
Dinsmore: I had to go through all of them and see that our Board of Directors was 100% convinced that we had touched every base regarding dealing with what is out of the ordinary.
Scott: Could you tell us something about how you use convertibles in the portfolios of the two funds?
Dinsmore: For convertible management in a portfolio, you can make the portfolio more interest rate related or sensitive or more equity sensitive. If you are very bullish, you can go for low premium convertibles and make it very equity sensitive. If you are not as bullish, you can do several things, but the biggest one is you can make it more interest rate sensitive and less equity sensitive by buying large premium large yield convertibles.
Scott: Where are you now?
Dinsmore: There is a third alternative. We have choices: buying short maturity convertible bonds or buying zeros that have puts.
Scott: Would you explain how these puts work?
Dinsmore: The puts allow us to give the bonds back to the company at a specific price and on a specific date in the future. We use a fair amount of these, certainly in a market like this it allows me to be more invested than somebody who is fearful might want to be. This makes it possible for me to be invested in some more volatile stocks in issues that aren't as volatile. If the stocks move up significantly we will get a portion of that move. You, therefore, look for common stocks that you like and which you think will perform at least in line with the market.
Scott: How about the quality of the convertibles?
Dinsmore: We look for quality. The average convertible has a double B minus rating. Our average is triple B. We try to skew our portfolio towards the high quality end.
Scott: Do you think people really understand how convertibles work?
Dinsmore: If they are into closed-end funds, the odds are they will have at least a basic understanding of convertibles. I think people who feel comfortable buying closed-end funds are more sophisticated than people who do not. I have not yet met someone who is into closed-end funds who does not have a basic understanding of convertibles.
Scott: Currently on October 1st, are you bullish or bearish or something in between?
Dinsmore: Barrons has a wonderful article today on how stock markets do during wars. I think it is instructive. One thing that is clear is that wars do different things to different markets. It does tend to make markets more volatile, but I don't think you can draw any conclusions from wars. Anyone who tells you that the market does well or poorly in wartime isn't paying attention. We have a fair amount of cash now — over ten percent — whereas we normally try to keep under 5% cash. We are a closed-end fund and don't have to worry about redemptions as mutual funds do. Therefore, for us to have a lot of cash is unusual. On the other hand, we only buy things when we feel comfortable that they are reasonable to own. Right now we are seeing some bargains out there — in healthcare in particular as well as some convertibles in the energy industry even though we think the price of oil is likely to go down. I think certain regional banks and savings and loans are attractive. There are a few technology companies that are starting to do well. We have big positions in the telecom industry that we are adding to. Lucent and Nortel have attractive convertibles but may not be attractive common stocks. We do have a big position in Johnson & Johnson.
Scott: What about AT&T?
Dinsmore: Their management has much to prove to me. If Bell South were to takeover AT&T, that would be very interesting. We are in flux right now. My basic thoughts are bullish at the moment, but I think there are some serious landmines we may step on so we have to be very careful.
The market is far more attractive than it has been in a couple of years, certainly from a value point of view. For those who say it is not from a value point of view and who say the P/Es have not come down, I say yes but the earnings have come down to more realistic numbers. On top of that the earnings are far more realistic because of the changes we have seen in GAP accounting.
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