CSQ - ACV: Improving Diversification But Valuation Ignores Distribution Risks (Downgrade)

2024-05-01 17:30:06 ET

Summary

• Virtus Diversified Income & Convertible Fund pays a 9.83% yield, which is certainly attractive for a closed-end fund that does not invest solely in fixed income.
• The ACV fund has underperformed the convertible index over the past 3 months but outperformed when distributions are included.
• The fund has reduced its allocation to convertible securities and increased its allocation to junk bonds since the start of the year.
• This fund failed to cover its distributions for two years straight and may be unable to sustain itself due to low net investment income.
• The fund is trading at a premium valuation, which appears to be unjustified.

The Virtus Diversified Income & Convertible Fund ( ACV ) is a closed-end fund aka CEF that income-focused investors can purchase as a method of achieving their goals of receiving income from their portfolios to pay their expenses. As the name of this fund implies, the Virtus Diversified Income & Convertible Fund employs a somewhat different strategy to most income-focused funds, as it invests a significant proportion of its assets into convertible bonds. This is nice in some ways, as convertible bonds are a very reasonable way to obtain an attractive yield without the need to sacrifice the potential upside of an equity investment.

The reasonably attractive yields that can be obtained from these securities extend to this fund as well, as the Virtus Diversified Income & Convertible Fund pays a 9.83% yield at the current share price. This is a yield that will likely be very attractive to anyone who has had a bit of experience with the markets, as most things have had sub-5% yields over the past decade. It is now much easier to get yields that are close to double-digits than it used to be by investing in fixed-income securities, but convertible bond funds are one of the few ways to obtain such a yield and still have exposure to the potential for capital gains that accompanies an equity investment....

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