In this week’s Investment of the Week, Vivian Lewis, Editor of Global Investing, explains why she likes this global closed-end fund.
“Insiders Saba of Grand Cayman bought another $992,000 in shares of Advent Claymore Global Convertible Fund (AGC), a closed-end fund (CEF) in which it now owns ~11.5%. AGC pays most of its dividend in the form of return on capital, but it pays out well over 10%, which makes it a good pick for income.
The fund trades at a juicy 13%+ discount from the positions in its portfolio, the net asset value (NAV). That means you get $1.13 working for you for every dollar you invest in AGC. Moreover, unlike the USA-only convertible stock and bond fund from the same Guggenheim Partners managers, Advent Claymore Convertible Fund, AVK, which lost 14.6% last year, AGC lost only 11% in value in 2015.
Both funds are managed by an analyst team specializing in valuing convertible stocks and bonds, common stocks, and straight (non-convertible bonds). The ideas are assembled by the man Bloomberg called “the king of convertibles” Tracy Maitland, its current CEO, and F. Barry Nelson, the convertibles guru formerly with Value Line Convertible newsletter who still is on its board but has now retired from active management.
The team can quickly work out valuations and premiums between different instruments from the same company: convertible bonds or shares, common stock, and straight bonds. They do it in-house rather than waiting for rating agencies. That means they can cover smaller issues outside the US which often are unrated.
They arbitrage by buying and selling different instruments to cut risks. The better performance of AGC shows that foreign convertible arbitrage pays off better than domestic.
In a period when interest rates are rising, convertibles appeal as their eventual value goes up with the common shares they convert into. That keeps them from losing value the way straight bonds do in a higher-yield environment. On the other hand, when stocks are selling off, the yield part of a convertible offers some protection on the downside.
As interest rate trends change, the portfolio can shift its macro position, to be long shares or long bonds. Convertibles are an asset class that swings both ways.
But you don’t get 10% yields without risk. Here are some:
Most importantly, in 2015, my tax file shows AGC paid earned dividends of 2.7% and the rest (a total of 10.07%) in the form of non-taxable return. It has been doing this under its by-laws since Guggenheim became the fund owner. Its distribution ratio (which may include ROC) has long been over 10%, and currently it pays outs 47 cents/share from income but also another 94 cents/share in return of capital per quarter.
Part of that money is unearned, although not the whole of it, as the arbitrage described above also produces earnings not classified as dividends or interest. It is counted as return of capital but results from the strategies using common stock or straight bonds to offset convertible risk. Insider Boaz Weinstein of Saba now reports his buys directly to the SEC. He manages the Saba Offshore Feeder Fund which invests Canadian Federal Employees’ pension money. Saba is being sued for allegedly manipulating asset prices of its holdings by overpaying to buy them. The Canadians want to cash out of Saba.
Its May buy was the first time a Saba offshore purchase was reported to the SEC rather than to fund trackers, a result of the Canada lawsuit. Earlier we only learned that insiders were buying the fund.
If Boaz Weinstein has to cash out to repay the Canadian pension plan, it may push AGC’s price even lower against its NAV. However, as a closed-end fund, it doesn’t have to sell holdings if Saba sells, because its shares are traded like any other stock, based on the market rather than NAV. Open-end mutual funds and exchange-traded funds do not offer a discount from NAV. If the share price falls over Saba, I can buy more at a bigger discount from NAV.
A higher risk in my view is from its 42%+ leveraging to boost the return on its wide-ranging portfolio. This boosts its expense ratio (for the interest on its borrowed money) to over 2%. Before the stock market weakened last summer, it was nearly 77% leveraged and its expense ratio was even higher, at 3.2%, so it has pulled back. Leverage can hit the fund if the team misjudges markets.
AGC is at least 50% invested in foreign securities, which is why it is in our portfolio, and is also required under its by-laws. Its number two holding now is Allergan preferred, at 2.97%, and its 10th is Glaxo ADRs, at 0.95%, as its favorite sector is healthcare.”
Vivian Lewis, Global Investing, www.global-investing.com, 212-758- 9480, May 2016
Wall Street’s Best Investment Editor’s Note: This fund’s largest sector is healthcare (55.66% of assets), followed by Consumer Cyclicals (11.5%) and Technology (5.8%). For additional information on closed-end funds, go to http://www.morningstar.com/solutions/Solutions.aspx?docid=371596, where you’ll find a comprehensive library of relevant articles.