CGO - CGO: Multi-Asset Global Allocation CEF 10% Yield

2023-12-26 16:20:09 ET

Summary

• Calamos Global Total Return is a multi-asset closed-end fund.
• CGO holds a mix of global equities, convertibles, and bonds, with a focus on information technology and a global mandate beyond North America.
• The fund is currently trading at a -9% discount to net asset value, historically at the lower end of its range, making it potentially attractive for investors.
• The CEF offers a historically supported 10% dividend yield, occasionally using return of capital, with a managed distribution policy adaptable to market conditions.
• The fund is favored for its global exposure, convertible sleeve, and anticipated performance in a low-rate environment, making it a potentially appealing investment option.

Thesis

Calamos Global Total Return ( CGO ) is a closed end fund. The vehicle contains a mix of equities and convertibles, with a small bond sleeve to finance the cash on the dividend distributions. The fund aims to provide a total return, through a combination of capital appreciation and current income. As per its literature, the CEF:

• Offers access to global markets, which complement and diversify an investor's equity allocation.
• Dynamically allocates assets based on the economic landscape and potential of individual securities.
• A broad range of global security types increase opportunities to actively manage the portfolio's risk/reward characteristics over full market cycles.

The fund is overweight the information technology sector via its equities holdings, and has a global mandate, with only 54% of its holdings coming from North America. This diversifier is an appealing feature for the fund, with investors being able to gain exposure to global equities via this actively managed instrument.

The CEF currently sports a 10% dividend yield which is well supported historically. While the latest distribution contains a high amount of return of capital, the fund has done well in utilizing capital gains for its distributions in 2023, as well as historically.

The fund has a very large -9% discount to net asset value which finds itself close to the lower band of the historical range for the name. We expect this discount to narrow and move to flat as rates move lower into 2024. This CEF has a high beta to rates given its convertibles sleeve, and will benefit from lower Fed Funds. Its discount is also highly tradable, with the CEF exhibiting significant volatility in this structural feature. The fund had a premium of 15% to NAV last year as an example.

We like this fund's global composition, its convertibles sleeve and dividend policy. We feel the name will benefit as lower rates take hold in 2024 and its discount will narrow significantly.

Analytics

• AUM: $0.1 billion.
• Sharpe Ratio: -0.12 (3Y).
• Std. Deviation: 19.2 (3Y).
• Yield: 10% (30-day SEC yield)
• Premium/Discount to NAV: -9%.
• Z-Stat: -1.
• Leverage Ratio: 32%.
• Effective Duration: 2.3 years
• Expense Ratio: 3.01%
• Composition: Equities & Fixed Income

Holdings

The fund is currently overweight equities and convertibles:

Common stocks make up 54% of the collateral, followed by convertibles at 22.4% and corporate bonds at 10%. Given their equity like features, convertibles in this case are more akin to the equity sleeve, and they play on one of Calamos' strength.

On the equity side tech holdings represent the highest allocation from a portfolio perspective:

We can see the same story unfold on an individual stock basis, where the largest holdings fold in the information technology sector:

To note the Ford holding in the above table references a convertible bond. The security pays a 0% coupon, which is typical for many convertible issuances, and has a determined maturity date.

The fund has a global mandate, with almost half of the portfolio coming from jurisdictions outside North America:

Going into 2024 this will be a strength, with valuations more attractive outside of North America currently.

The held portfolio of bonds is a mixed bag, with a blend of investment grade names and junk bonds:

We can see from the above table that 25% of the portfolio is investment grade, while over 30% is junk, and a large unrated category which clocks in at 39.4%.

Premium/Discount to NAV

The fund is currently trading at a discount to net asset value:

Based on its five year history, the CEF is trading at an unusually high discount to net asset value. We can see the name usually trades around flat to NAV, with periods of large variances that should be traded (like the end of 2022 when the name went to a premium of over 15%). CEFs that exhibit this kind of volatility for their premiums to NAV should be range traded when opportunities arise.

The discount looks very attractive here from a historic range perspective, with the fund trading at the bottom of its discount range.

Distribution policy

The fund currently has a managed distribution policy in place, targeting a $0.08 monthly distribution:

While the most recent month, namely December 2023, exhibits an unsupported dividend yield, historically the fund has done well in covering its cash outlays:

On a longer time horizon the CEF's NAV is not decreasing, but fairly stable, albeit very volatile. In years when the underlying asset performance is not that strong, expect some ROC utilization. Conversely in the years when the market is rallying the CEF will see a fast accretion to its NAV. Management has the ability to change its distribution policy based on market conditions

Performance

CGO is about to close on a very profitable 2023:

The fund's total return this year is now in excess of 15%, but more importantly it has spent most of the year in the black. As we can see from the above graph, the CEF has consistently outperformed the Invesco S&P 500 Equal Weight ( RSP ) fund in 2023, as well as the iShares Core Growth Allocation ETF ( AOR ). We are choosing the RSP fund for a comparison here because CGO has equal weight allocations to a large extent in its portfolio, with no outsized single name concentrations.

Historically the CEF is equally impressive:

Given its convertibles sleeve, the fund has a higher beta to low rates, thus the observed outperformance during the 2020/2021 zero rates environment. As rates move lower in 2024, expect the fund to outperform both RSP and AOR.

Conclusion

CGO is a closed end fund from the Calamos family. The vehicle has a global mandate and is overweight equities and convertibles, with a small bond sleeve. The fund has done very well in 2023, posting a total return in excess of 15%, despite its discount to NAV widening. The CEF has a very volatile performance in its discount, with a premium last year of over 15% that has now switched to a discount of -9%. The current figure is close to the bottom of its historic range and we expect it to move flat to NAV as rates continue to move lower into 2024. The CEF has a managed distribution policy but has done very well historically to distribute what it makes on multi-year time-frames. We like this name here given its global equities portfolio and convertibles sleeve and we feel the fund will trade flat to NAV as rates move lower into 2024.

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