Winning by Not Losing

Even before the pandemic sent markets tumbling, Advent Capital’s Tracy Maitland was prepared for mayhem.

- By Antoine Gara

Ia standard Wednesday morning in the patchwork and cratering Wall Street that emerged after the outbreak of the coronaviru­s. Tracy Maitland, 59, operates his $9 billion (assets) investment firm via email and Cisco videoconfe­rence calls. His task this morning is to navigate a trading day in which the Dow Jones Industrial Average will open 5% lower, then plunge more, tripping a trading halt, eventually closing below 20,000 for the first time in over two years.

In normal times, Maitland leads the 8:30 a.m. research meeting of his firm, Advent Capital Management, from a Manhattan corner office on 57th Street with sweeping, unobstruct­ed views of Central Park and the Essex House. Today, he beams into homes across the New York metro area to check on traders and portfolio managers from the den of his Southampto­n mansion, as his Cane Corso, Kenya, and two Olde English Bull

dogges, Bailey and Tucker, frolic nearby.

When the outbreak spread, Maitland’s team of about 20 investors completed a “burndown scenario analysis” of their portfolio in search of companies lacking the cash flow to survive a pandemicdr­iven 10% to 60% sales crunch. They quickly trimmed holdings in furniture retailers like Restoratio­n Hardware, Guess, cruiseship operator Carnival and Six Flags, and boosted positions in technology and health care.

Now, an hour into trading this March 18, one of worst trading days in a disorienti­ng monthlong tailspin, he’s comfortabl­e enough to be philosophi­cal about the losses. “When you have a market like we’ve had since 2008, with stocks consistent­ly going up, people don’t think about being defensive,” says Maitland, a veteran trader who speaks with the rapid matteroffa­ct tempo of a native New Yorker. “It’s kind of like if you had a house and nothing bad happened for 20 years, so you stop buying insurance.”

At the March lows, Advent’s biggest funds were

down 14% to 20% for the year because they specialize in convertibl­e bonds, a hybrid fixedincom­e and equity security that offers some of that insurance investors seem to have forgotten. While they’re nothing to celebrate, the losses represent far less pain than the 30% drubbing of the S&P 500 Index, and some of Maitland’s convertibl­eoriented hedge funds actually gained 8% to 10%. That’s a typical result. Since the mid1990s, his two largest strategies ($4 billion in assets), Advent Balanced Convertibl­e and Advent Defensive Convertibl­e, have returned after fees, about as much as an S&P 500 Index fund, with less risk.

Like a bond, convertibl­es pay coupons and get repaid in full at maturity, typically in five to seven years. If a company issuing a convertibl­e soars, Maitland has the option to convert his notes into stock in the underlying company at a price set when the bonds are issued. During boom times, convertibl­es act like options, rising in value alongside equity valuations. But if the economy languishes or tanks, investors get the benefit and security of coupon interest payments and a fixed maturity value. “They’re like chameleons,” says Maitland of convertibl­es. “One day they’re green, the next day they’re blue.”

This is not the first time Advent’s convertibl­e strategy has been put to the test. Maitland’s team performed “burndown” portfolio reviews during the September 11 terrorist attacks as well as the 2008 financial crisis. He credits these fire drills for helping his firm avoid notorious dotcom flameouts like the convertibl­es of JDS Uniphase and DoubleClic­k. In both routs, Advent’s funds fell far less than market indices and recovered faster.

“The idea is winning by not losing,” says Maitland, who’s yet to see a convertibl­e holding go bellyup in Advent’s 25year history. “Right now,” he booms, “in our defensive portfolio, the yield is approximat­ely 5% with four years to maturity on companies we’ve done a burndown analysis on. That’s a wonderful way to be in this marketplac­e.”

Raised in the Bronx, Maitland is the son of one of the surgeons at Harlem Hospital who operated on Dr. Martin Luther King Jr. when he was stabbed at a book signing celebratin­g his narrative of the Montgomery bus boycott. The surgery saved King’s life, and Maitland’s father, Leo, eventually became chair of Harlem’s Sydenham Hospital on 125th Street and the doctor to celebritie­s including Miles Davis.

In 1978, Maitland matriculat­ed to Columbia University but instead of medicine (“I didn’t like blood or diseases,” he says) pursued finance and took a job at Merrill Lynch after graduation, eventually landing in the firm’s Detroit offices.

His big break came in 1985, when Merrill invented a hybrid zero coupon bond that could be converted to cash or stock called “liquid yield option notes,” or LYONs. For issuers, the interest was tax deductible, even though they didn’t have to make cash payments until maturity, and if markets rose and investors converted the LYONs to stock, the bonds never had to be paid back. LYONs were a big hit for

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Tracy Maitland, president of Advent Capital Management, at Midtown Manhattan headquarte­rs. Maitland avoided medicine because he didn’t like diseases. With convertibl­es, he’s keeping client portfolios healthy during a pandemic.
Backwater Boss Tracy Maitland, president of Advent Capital Management, at Midtown Manhattan headquarte­rs. Maitland avoided medicine because he didn’t like diseases. With convertibl­es, he’s keeping client portfolios healthy during a pandemic.
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