PCF - CCD: Technology Exposure And Premium Valuation Problematic

2025-03-12 07:36:10 ET

Summary

• The Calamos Dynamic Convertible and Income Fund offers high current income and inflation protection by investing in convertible and fixed-income securities, yielding 10.87%.
• Despite its high yield, the fund's recent performance has been disappointing, largely due to its significant exposure to the underperforming technology sector.
• The fund's allocation to corporate bonds has increased slightly over the past few months, which is a smart decision, but it remains very heavily exposed to convertibles.
• The fund's leverage is relatively high at 36.27%, which amplifies both gains and losses, adding to its risk profile.
• Currently trading at a 22.94% premium to NAV, the fund appears expensive compared to its peers and historical averages, making it hard to justify its valuation.

The Calamos Dynamic Convertible and Income Fund ( CCD ) is an interesting closed-end fund that investors can purchase as a method of earning a very high level of current income from their assets without having to sacrifice the inflation protection that is built-in to equity securities. As I explained in two very recent articles (see here and here ), the past several months have seen a return of inflation and indeed the annualized rate of inflation has increased in every month since September 2024. Many income-focused closed-end funds invest in fixed-income securities, which are generally not good securities to own in such an environment. After all, bonds may or may not be delivering a positive real return at their current levels, depending on what the actual rate of inflation is. Even if we accept the consumer price index as an accurate measure of inflation, bonds (with the possible exception of junk bonds) are not delivering positive real returns on an after-tax basis.

Bonds have, in fact, delivered negative real returns for quite some time. This chart shows the total (dividends and bond coupons reinvested) return of the Vanguard 500 Index Fund ( VFINX ), the Vanguard Total Bond Market Index Fund ( VBMFX ), and the U.S. dollar since the start of 2020:

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