Fidelity Focused Stock (FTQGX) has been a very strong performer. Stephen DuFour has managed Fidelity...
Calamos: A Convertible Opportunity
09/04/2013 9:00 am EST
The sharp increase in yields experienced this spring hit investors in closed-end funds (CEFs) especially hard. This is an opportunity, suggests Genia Turanova, editor of Leeb Income Performance.
Selecting quality remains imperative, but many good closed-end funds now sell at bargain prices.
While these investments are interest-rate sensitive, well-selected closed-end funds, run by respected managers and with good track records, now out-yield the market, yet sell at a discount to their NAVs.
The group that manages Calamos Convertible and High Income (CHY)—our new recommendation—specializes in convertible securities, and this fund's typical composition includes both converts and high-yield bonds.
The fund's primary objective, income, and its current yield of 8.2%, appeal to income investors in this low interest-rate environment.
The fund achieves these goals by selecting higher-yielding fixed income securities, complemented by convertibles, and by prudently using leverage.
Most recently, the fund was 52.6% invested in corporate bonds, 22.7% in convertible bonds, 13.7% in convertible preferred stock, 8.4% in synthetic convertibles, and the rest in cash, common stock, and US government securities.
This has resulted from the fund's second quarter prudent lightening-up of investments in corporate bonds, and its increased positions in convertible securities.
Convertible securities are hybrid securities that combine the qualities of bonds and stocks and allow investors to maintain some upside exposure from equities, while still obtaining income that typically exceeds the payoff from the underlying equity.
An index of convertible securities, for instance, was up 2.2% during the second quarter of the year.
From the perspective of credit quality, the fund held its highest allocations in the BB credit tier, as its managers believe this level offers a better risk/return dynamic while continuing to provide regular income.
In terms of economic sectors, the fund is most heavily exposed to the energy, consumer discretionary, industrials, and information technology sectors.
The fund recently traded at about an 8% discount to the net asset value of underlying shares. This isn't a newly created bargain, granted, as the fund has traded at a discount for most of the last five years. However, buying a fund at a discount is better than buying it at a premium.
What to do now: For high current yield, buy Calamos Convertible & High Income closed-end fund.
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