PCF - NCZ: Good Concept But This Convertible Fund Does Not Measure Up

2024-04-14 08:51:17 ET

Summary

• The Virtus Convertible & Income Fund II is a closed-end fund that invests in a combination of convertible bonds, common stock, and fixed-income securities.
• The fund has a 12.59% yield, which is attractive compared to other asset types.
• The fund's portfolio is decent, as many of the companies in it have seen significant gains since the date that their convertible bonds were issued.
• The fund has significantly underperformed its peers over the past several years, and is one of the few closed-end funds to not have a positive three-year total return.
• The fund's valuation is reasonable, but its ability to sustain its current distribution is questionable.

The Virtus Convertible & Income Fund II ( NCZ ) is a closed-end fund that invests in a combination of convertible bonds, common stock, and fixed-income securities. This is a good concept, although it is perhaps not quite as attractive as it was a few years ago. For most of the past fifteen years, it was very difficult to obtain an income from either common stocks or fixed-income securities, so convertibles were a nice compromise. They allowed investors to get at least some income today without requiring them to sacrifice the upside potential that was only possible through investment in common stocks. However, now that interest rates have once again risen to a reasonable level, fixed-income securities are actually attractive to hold by themselves. The bubble that existed in convertibles back in 2020 and 2021 has popped and leveraged closed-end funds such as the Virtus Convertible & Income Fund II continue to pay the price even today.

This is not to say that there is nothing at all attractive about this fund today. It does have a 12.59% yield at the current price, which is quite attractive relative to common stocks, junk bonds, or just about any other asset type. The fund's yield also compares reasonably well to that of its peers, as we can see here:

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