GLV - GLV: High Beta Equity CEF With A Large Cap Value Build

2023-08-01 03:37:23 ET

Summary

• Clough Global Dividend and Income Fund is a high leverage equity CEF managed by Charles I Clough.
• GLV has underperformed in 2023 due to its high leverage and focus on Large Cap Value stocks, which have been dragged down by the regional banking crisis.
• The CEF runs an enormous 39% leverage ratio, with a portfolio mostly composed of U.S. equities.
• High beta plays like GLV do well in structural bull markets, but tend to underperform in other cycles.

Thesis

After covering the sister fund Clough Global Opportunities Fund ( GLO ), it is time to have a look at the Clough Global Dividend and Income Fund ( GLV ) as well. Both funds are managed by the same gentleman, namely Charles I Clough. GLV employs a similar structure, an 85% equities, 15% fixed income CEF with a high leverage ratio of 39%.

A high leverage ratio for an equities CEF means a very high beta for the fund. Basically the CEF borrows money to enhance its returns on certain stocks. It is akin to trading on margin in your personal account:

Trading on margin means borrowing money from a brokerage firm in order to carry out trades. When trading on margin, investors first deposit cash that serves as collateral for the loan and then pay ongoing interest payments on the money they borrow.

Trading on margin works when the underlying equity names increase in value. Otherwise you just end up paying high borrowing fees, or even worse, you get to see your losses magnified. In the CEF world we see many fixed income funds with leverage, because that is how you boost the existing cash-flows and enhance the yield. It is very unusual to see high leverage equity funds. The high leverage for the fund translates into high fees:

This CEF is best to have in a raging bull market when you just layer up leverage on an equities portfolio and look at the portfolio manager's trading acumen to boost your returns. A static or down market translates into extremely poor results via GLV. And that is what we have seen:

The fund was down -31% in 2022, and is down in 2023 as well. We are going to explore in this article the reasons behind this underperformance and our view on the forward for the CEF.

Why is the fund down in 2023 when the market has rallied?

This CEF is not a static buy-and-hold vehicle. The manager trades the portfolio significantly:

In active funds one would see a 30% to 50% portfolio turnover. Here the ratio is 199%! That means this vehicle is more of a 'hedge-fund light' type of CEF. You are relying a lot on the active trading acumen of the main portfolio manager here.

Secondly, the CEF is oriented toward Value - Large Caps, which have not done that well so far this year:

Technology has been on fire in 2023, but Financials and Energy names for example have not. Financials has a significant weighting here:

The names in the respective industry bucket as of the April Semi-Annual report are:

While Bank of America and JPMorgan have had only modest drawdowns, the likes of KeyCorp is still down -30% for the year. The takeaway is that the fund has been long Large Cap Value names, which have not done extremely well this year, with the regional banks crisis taking a heavy toll on this CEF.

CEF Holdings

As of the April 2023 Semi-Annual report, the fund had the following composition:

We can see the CEF being overweight U.S. equities, and as discussed above, the fund emphasizes Large Cap - Value names. That is a fairly conservative approach, but it has not managed to make any money this year.

Distribution & Returns

Kindly keep in mind that when a CEF's portfolio does not perform (i.e. generate a positive total return), the dividend you are getting is all return of capital (i.e. your own money). This is what we are seeing for this CEF as well, with its disastrous performance as of late putting a very serious dent in its AUM:

The fund's AUM is only $85 million now, and if we do not see a raging bull market soon we are of the opinion GLV will merge with GLO. From a pure operational cost perspective it does not make sense to have very small CEFs out there.

What is next for GLV

We view this CEF as a high beta play on Value stocks. We would only buy GLV in an established cyclical bull, with the vehicle's leverage constituting a large detractor for other economic environments. We are of the opinion we are not in a new bull market, and the current equity euphoria will end with another sell-off. It is debatable how deep the next one will be, but irrespective a high beta CEF is not a place to be. To that end we see another -12% to -15% downside here for GLV during the next market leg down.

Conclusion

GLV is a multi-asset CEF with a 85% equity, 15% fixed income build. The fund is overweight Large Cap Value U.S. stocks, but has a very high portfolio turnover and a 39% leverage ratio. The structuring characteristics make this CEF a very high beta play, and despite the market rallying this year, GLV is down in 2023. The CEF was severely pulled down by the regional banks crisis and its high leverage. With the overall market feeling euphoric, investors should be looking to exit high beta funds across the equities and fixed income spectrums. GLV is a long only in a proven cyclical bull, and an investor also needs to get comfortable with the large impact the portfolio manager has here. This CEF has a high portfolio churn, which means you rely heavily on the portfolio manager's trading acumen rather than a particular sector in the market. We expect another leg down in this CEF and would trim down high beta names like this one from a portfolio. GLV is a Sell here for us.

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