Summary
- During the past 16 weeks, Calamos Strategic Total Return Fund’s price went up to almost $15 and then again dropped down to $14.35. It is currently trading at a discount of 2.72 percent.
- Although ICT stocks - which comprise almost 30 percent of its equity portfolio - are performing poorly, CSQ’s price grew by almost 7 percent this year.
- CSQ has a high assets under management, which enables it to diversify its investments in a large pool of equities and fixed income securities, and generate a high total return.
- CSQ pays monthly distribution and generates strong yield, which also seems sustainable, considering the returns generated from its high-yield bonds.
~ by Snehasish Chaudhuri, MBA (Finance).
Calamos Strategic Total Return Fund ( CSQ ) generates a strong yield and equally high annual average total return. The fund pays monthly distribution, which also seems sustainable, considering the returns generated from high-yield bonds, where this fund, too, has made significant investments.
At the time of my last coverage during the first week of November, 2022, CSQ’s stock was trading around $13. During the past 16 weeks, the price went up to almost $15 and then again dropped down to $14.35. The fund is currently trading at a discount of 2.72 percent. CSQ is a fundamentally strong fund, and I expect its price to cross this $15 mark. However, due to overall economic slowdown and fear of a possible recession, investors might not be rushing to accumulate this fund. Specifically, the technology stocks, which compose almost 30 percent of its equity investment, are in a poor shape right now.
CSQ Has a Fully Diversified Active Portfolio and Has a High Expense Ratio
Calamos Strategic Total Return Fund is a closed-end balanced mutual fund ("CEF") that invests in common and preferred stocks in diversified sectors, convertible securities, and high-yield corporate bonds. Its corporate bond portfolio has an average S&P credit rating of BB. Weighted average coupon earned on CSQ’s fixed income securities portfolio is a little less than 4 percent. Its portfolio has a stated objective of generating total return through a combination of capital appreciation and current income. CSQ employs both fundamental and quantitative analysis with a combination of bottom-up and top-down security picking approaches to create its portfolio. The fund has a high expense ratio of 2.32 percent, but this ratio is inclusive of leverage fee of 1.27 percent.
Calamos Strategic Total Return Fund was launched by Calamos Investments LLC. It is managed by Calamos Advisors LLC. The fund was formed on December 31, 2003. Normally it will invest at least 50 percent of its managed assets in equity securities. It may invest up to 35 percent of its assets in foreign securities, including debt and equity securities of corporations and governments of developed and emerging markets. Up to 15 percent of its managed assets may be invested in emerging markets. Up to 15 percent of its managed assets also may be invested in securities that are illiquid at the time of investment. Currently, its share of investments in equity, convertibles and corporate bonds are 61 percent, 17 percent, and 12 percent respectively.
CSQ Has Continued with its Major Tech Investments Despite a Poor 2022
CSQ’s major investments in the Information and communication technology sector included Apple, Inc. ( AAPL ), Amazon.com, Inc. ( AMZN ), Alphabet, Inc. - Class A ( GOOGL ), Microsoft Corp. ( MSFT ), Broadcom Inc. ( AVGO ), and NVIDIA Corporation ( NVDA ). This fund also has a stake in iShares China Large-Cap ETF ( FXI ), which primarily invests in technology-based stocks like Tencent Holdings Limited ( TCEHY ), Alibaba Group Holding Limited ( BABA ), Meituan ( MPNGF ), JD.com, Inc. ( JD ), Baidu, Inc. ( BIDU ), etc. Together these seven stocks accounted for almost one-sixth of CSQ’s entire equity investments.
Earlier, Calamos Strategic Total Return Fund had significant investments in Meta Platforms, Inc. Class A ( META ), which performed quite poorly in 2022, but started gaining momentum in early November. Within the next three months, META’s price grew by more than 100 percent, and has been on a downward slope since the beginning of this month. So, reducing its stake in META after making huge gains seems to be a quite sensible move. This move is significant, since CSQ doesn’t have a very high portfolio turnover ratio.
CSQ Generates Strong Yield & Attractive Total Returns on a Consistent Basis
Calamos Strategic Total Return Fund also has invested significantly (almost 36 percent of its equity portfolio) in financial, industrial and healthcare stocks. Major investments included pharmaceutical giant Eli Lilly and Company ( LLY ); medical equipment and device manufacturers UnitedHealth Group Incorporated ( UNH ) and Johnson & Johnson ( JNJ ); diversified aerospace and defense industrial company Raytheon Technologies Corporation ( RTX ); largest payment card network processors - Visa Inc. ( V ) and Mastercard Incorporated ( MA ); one of the world's largest banks - JPMorgan Chase & Co. ( JPM ), and one of the largest global FMCG brands - Procter & Gamble Company ( PG ). Investments in these three sectors, too, have remained relatively unchanged.
Calamos Strategic Total Return Fund has been paying a steady monthly dividend for almost 19 years. During the past 10 years, the fund generated an annual average yield in the range of 8 to 10 percent. Average yield recorded in 2023 is 8.7 percent. Despite a poor NAV growth in 2022, the yield was still higher than 8.25 percent. On the basis of an average coupon of little less than 4 percent, and equally strong returns generated by its equity investments, CSQ was able to maintain such a strong yield. Over the past 7 years (2016 to 2022), the fund has been able to record an annual average total return of 15.7 percent. This is remarkable despite a price loss of 30 percent during 2022.
Investment Thesis
Information and communication technology stocks will take time to stabilize. I have no doubt that in the coming decade, stocks from ICT, Healthcare, the industrial and financial sectors will have higher-than average growth potentials. Almost two-third of CSQ’s equity investments are in these four sectors. And despite ICT stocks, which comprises almost 30 percent of its equity portfolio, performing poorly, CSQ’s price grew by almost 7 percent in 2023. This is in sharp contrast to what happened during 2022.
In my last coverage , I found that CSQ’s market price fell by almost 29 percent and its total return was negative 25 percent during the first ten months of 2022, primarily due to poor performance of technology stocks. Considering this, I am a bit conservative about the price movement of Calamos Strategic Total Return Fund despite having full faith on the fundamentals of this CEF. Thus, I expect CSQ’s price to range within a band between $13 to $15 for another few months, and then it’ll have a strong upward rally. However, during the long run, my view about Calamos Strategic Total Return Fund is quite bullish.
And as discussed earlier, Calamos Strategic Total Return Fund generates a strong yield and equally high annual average total return. The fund pays monthly distribution, which also seems sustainable, considering the returns generated from high-yield bonds, where this fund too has made significant investments. CSQ also has a high asset base, which enables it to diversify its investments in a large pool of equity stocks and fixed income securities.
Considering all these factors, Calamos Strategic Total Return Fund should suit both income-seeking investors and growth-seeking investors. However, my suggestion will be to wait for the right price to accumulate CSQ shares, something around $13.
For further details see:
CSQ: High-Yielding Diversified Balanced Portfolio, Also Seems Sustainable