A Solid 11% Yielding Convertible Bond Portfolio
But It's Overshadowed By High Costs And Volatility
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
One area of the market that’s gotten interesting over the past couple years is convertible bonds. These are the stock/bond hybrids that come with characteristics of both securities, but usually give owners the flexibility of keeping it more of a traditional fixed income note or converting it into equity at some point. They typically don’t pay terribly high yields, but the ability to maintain a bond-like investment with the option to flip it into stock, just like a call option, offers a degree of investor protection that can help people feel like they’re not necessarily missing out should equities start to rally.
The Calamos Dynamic Convertible & Income Fund (CCD) not only focuses on this area of the fixed income market, the “dynamic” part allows it to move into and out of other income securities as well as conditions warrant. While that sounds good on the surface, the high degree of leverage used by the fund and the cost that goes with it puts it behind the 8-ball right out of the gate and makes it that much more difficult to beat out its comps on a risk-adjusted basis. It’s a matchup of flexibility & high yield vs. total returns & cost.
Fund Background
CCD invests in convertibles and other high-yield fixed-income securities with the aim of generating total return through a combination of capital appreciation and income. To help generate income and achieve a favorable risk/reward profile, the investment team can also sell options. In addition to that, the fund also utilizes leverage in order to enhance yield and total return potential.
While the mandate only requires a minimum 50% allocation to convertibles, this is ostensibly a convertible security portfolio. There’s enough exposure to other assets that it doesn’t become a pure play to convertibles, but it ends up being pretty close. The fund is diversified enough that it becomes a relatively good convertible proxy, but it comes down to two things - is the fund too costly to own and are the fund managers delivering enough value and alpha to justify the higher cost. The problem with leveraged CEFs in this market (CCD has leverage in the amount of 37% of assets) is that higher interest costs have made them almost untenable. The 1% management fee is pretty average for this type of fund, but the additional leverage cost, which brings the total expense ratio to more than 3%, is a difficult bar to clear.
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