CHY: Well-Positioned, But Extremely Expensive

2025-02-21 17:56:29 ET

Summary

• Calamos Convertible & High Income Fund offers high-income and equity market exposure, making it attractive for yield-seeking investors.
• The CHY closed-end fund's 10.69% yield is competitive, though not the highest in its category, and its performance has been strong, especially over the past five years.
• CHY is overweight convertible bonds, which is very good for protection against inflation.
• The fund employs significant leverage, which boosts returns but also increases risk; however, management appears to control volatility effectively.
• The fund trades at a premium to its net asset value, making it expensive compared to peers.

The Calamos Convertible & High Income Fund ( CHY ) is an interesting closed-end fund, or CEF, that allows investors to earn a very high level of income without completely sacrificing their exposure to the equity market. With that said, the Calamos Convertible and High Income Fund is technically a fixed-income fund, and as I have explained in previous articles (such as this one ), fixed-income securities offer essentially no protection against the loss of purchasing power that accompanies inflation. However, as is the case with many Calamos funds, this one invests in convertible securities and convertible securities provide exposure to the equity market due to the conversion feature. This provides them with an equity-like upside that is far superior to traditional fixed-income bonds.

For example, let us take a look at the performance of the iShares Convertible Bond ETF ( ICVT ), which tracks the Bloomberg U.S. Convertible Cash Pay Bond > $250 Million Index, over the past ten years. Here is the chart:

As we can see, the convertible bond index fund gained 78.46% over the past decade. That is not as good as the 190.69% gain that large-cap common equities ( SP500 ) delivered, but it is far superior to investment-grade bonds ( AGG ). Indeed, we can see that investment-grade bonds delivered a loss to their owners over the period (they were one of the few asset classes to do so). If we include the coupon payments that the convertible bonds in the index paid out, the total return of that security class rises to 145.39% over the period. This is still not as good as equities delivered, but it should still be pretty apparent that convertible bonds can deliver equity-like returns while still being fixed-income vehicles....

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