One of Berwyn Income's biggest holdings is American Equity Investment Life (AEL), an annuity and life-insurance outfit. The managers started buying the convertible 5.25% due Dec. 6, 2024, in early 2008, and kept buying through the autumn. "We were able to buy AEL bonds at a yield to put in excess of 20%," says George Cipolloni, 34, who manages the fund with Killen. The yield shot up after the Securities and Exchange Commission ruled that indexed annuities should be treated as securities, not insurance products. That raised fears that the West Des Moines, Iowa-based company would have to spend to retrain its staff, or hire new staff licensed to sell securities. Investors also fretted about potential losses in the company's investment portfolio. Like Berwyn, American Equity considered the bonds a steal. It bought back $78 million last fall of the $260 million issue, at about a 40% discount to the original issue price. That bolstered its equity when other life insurers' equity was eroding. The fund's managers like the insurer so much that they bought its stock as well, at about $3.87 a share. Shares now trade at about $5, versus their 52-week high of 11.63. Analysts think American Equity will earn $1.52 a share in 2009 and $1.62 in 2010.

Another big holding is the School Specialty 3.75% convertibles (SCHS), due Nov. 30, 2026. "The market took the price of the bond down, because tighter state budgets could hurt earnings," says Cipolloni. He concedes there may be pressure on earnings, but says the company's ability to generate free cash will help it repurchase debt in the open market. School Specialty supplies educational material.

In the drug sector, the fund last fall scooped up Valeant Pharmaceuticals'(VRX) 3% convertible due Aug. 16, 2010. The specialty-pharmaceuticals company has more cash than debt, and was actively buying back its debt late last year. Yet, Berwyn was able to capture yields close to 15%.

Chattem (CHTT), a maker of over-the-counter toiletries, is in similarly healthy shape, with a long history of rising earnings, good cash flow and a willingness to pay down debt. In this case Berwyn bought a single-B-rated bond, the 7% due March 1, 2014.

The contrarian Killen has been buying financial shares. One pick is Long Island-based Suffolk Bancorp (SUBK), which avoided the subprime fiasco. "They know exactly to whom they are lending, so they haven't had the loan losses that other banks have had, and their earnings have increased where other banks have faltered," he says. Not that that's helped the stock, which trades at around 25, after falling by nearly 50%. The fund's been buying SUBK shares since 2007, at an average cost of 27.12.

One is Kimberly Clark (KMB), the Dallas-based maker of Kleenex, Huggies and other household products. "The company's long-term return on capital is attractive," Cipolloni says. "The stock got depressed from a P/E [price/earnings multiple] perspective; the P/E is now about 12, down from 21 in 2006. We had an opportunity to buy a great company at a cheap price." Berwyn paid an average of 50.73 for shares that recently fetched around 49. Analysts expect the company to earn $4.15 a share in 2009, up from last year's $4.04. The 2010 consensus estimate is $4.56.

A long history of sound management attracted Berwyn Income's managers to Ennis (EBF), a business-forms company based in Midlothian, Texas. Although earnings are expected to fall this year and next, Killen and Cipolloni consider that less important than return on assets, around 9% in the past three years, and return on equity, in the teens for the past decade.