Convertible Bond Fund

Schultz Financial Mgmt Corp

Risk-Controlled Portfolios for Serious Investors

Convertible Fund

Fund Statistics

(Through 12-30-2005)

	Conv Fund	Conv Avg	S&P 500
2005 Return	8.06%	3.08%	4.90%
2004 Return	7.54%	8.42%	10.71%
2003 Return	27.25%	26.29%	28.70%
2002 Return	-4.60%	-7.87%	-22.23%
2001 Return	-4.20%	-6.78%	-11.90%

The "Convertible Fund" is a third party mutual fund (actual fund name not given) that we have used for our clients since 2001. The investment return shown is the net total return of the fund as reported by Morningstar.com and does not include our fees.

Investment Objective

Our objective for the Convertible Fund is to earn 80% of the long term returns of the stock market averages with about half of the downside risk during prolonged bear markets.

Investment Approach

This fund invests in hybrid securities, either convertible bonds or convertible preferred stock issued by companies looking for relatively inexpensive financing.

These securities can be converted to common stock at a specific time and price. But until conversion occurs, if ever, investors can enjoy the dividend yield that they pay. Convertibles funds generally invest the majority of their assets in convertible bonds, followed by a smaller stake in convertible preferred stock, as well as sprinklings of common stock and traditional bonds.

Generally speaking, convertible funds will achieve returns similar to stocks in up markets, although they're unlikely to surpass them, and more downside protection when equities sag, thanks to the income yields many of their holdings provide.

Convertible Behavior

Convertible bonds act more like stocks than bonds, so they won't completely insulate investors from stock losses. Still, they've surpassed all expectations during the recent bear market. Convertibles gained 4.7 percent annually between 1998 and 2002 vs. a loss of 0.6 percent for the S&P 500, while carrying about the same risk, reports Ibbotson Associates, the Chicago investment research firm.

Convertible Risks

In addition to market risk, there are certain risks associated with an investment in a convertible bond, such as default risk (the risk that the company issuing a convertible security will be unable to pay interest/dividends and repay principal) and interest rate risk (the risk that the convertible security may decrease in value if interest rates increase).