CHW: Very Impressive Recent Performance Could Result In Distribution Increase

seekingalpha05-29

PonyWang The Calamos Global Dynamic Income Fund (NASDAQ:CHW) is a closed-end fund, or CEF, that is intended for investors who are seeking to earn a very high level of income from the assets in their ...

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I explained the importance of achieving geographic diversification in a few recent articles (such as this one), and recent developments are making it even more important for investors to pursue this objective. The Calamos Global Dynamic Income Fund does not require that its investors sacrifice equity exposure to obtain a reasonably attractive yield either, so that is very nice considering that inflation continues to show its ugly head in the United States’s economic data. As of the time of writing, the Calamos Global Dynamic Income Fund sports a 9.00% distribution yield. That is reasonable, but it is still quite a bit lower than the yields currently being offered by its peers:   Fund Name Morningstar Classification Current Yield   Calamos Global Dynamic Income Fund Hybrid-Global Allocation 9.00%   Clough Global Dividend and Income Fund (GLV) Hybrid-Global Allocation 11.41%   Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) Hybrid-Global Allocation 8.19%   Guggenheim Active Allocation Fund (GUG) Hybrid-Global Allocation 9.56%   LMP Capital and Income Fund (SCD) Hybrid-Global Allocation 8.96%   PIMCO Global StocksPLUS & Income Fund (PGP) Hybrid-Global Allocation 11.02%   Virtus Total Return Fund (ZTR) Hybrid-Global Allocation 11.11%   Click to enlarge As clearly shown here, the Calamos Global Dynamic Income Fund has a lower yield than four of the seven funds shown here. It manages to beat two of them, but one of these is only lower by four basis points. Thus, the fund does not appear to be the most attractive fund in its category based solely on its yield. However, a fund’s yield is not necessarily the only thing that matters, so we should continue to examine it. We previously discussed the Calamos Global Dynamic Income Fund back in early November 2023. The global equity markets have generally been pretty strong since that time, but fixed-income has been more of a mixed bag, as some foreign central banks have started dumping U.S. Treasuries and investors are beginning to wonder about the trajectory of U.S. interest rates. The Calamos Global Dynamic Income Fund has overall managed to deliver quite a strong performance, however:   Seeking Alpha As we can see here, the Calamos Global Dynamic Income Fund has seen its share price appreciate by 27.05% since the date that the previous article on it was published. That is actually better than the S&P 500 Index (SP500) and the MSCI World Index (URTH), although not by very much. The fund outperformed the Vanguard World Bond ETF (BNDW) by quite a lot over the period, which was largely expected given the concerns surrounding the trajectory of interest rates. As I pointed out in a previous article: A simple look at a closed-end fund’s share price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. When we add the distributions that the Calamos Global Dynamic Income Fund paid out over the past six months to its share price movements, we get this chart:   Seeking Alpha This certainly makes the fund’s return look very impressive compared to some of the major market indices. Investors in the Calamos Global Dynamic Income Fund experienced a 34.62% total return over the period. This was better than either global equities or global bonds by quite a lot. That seems certain to appeal to any investor, not only those for whom income is their highest priority. However, a fund delivering a strong performance in the past is no guarantee that it will continue to do so in the future. Thus, we should take a look at the fund as it is today to make a reasonable guess at how it will perform in the future. This article will endeavor to do that, assisted by the fund’s annual report, which was released about two months following the publication of the last article on the fund. About The Fund According to the fund’s website, the Calamos Global Dynamic Income Fund has the primary objective of providing its investors with a high level of current income. The website describes its objectives and strategies thus: The Fund seeks to provide a high level of current income with a secondary objective of capital appreciation. The fund has maximum flexibility to dynamically allocate among equities, convertible bonds, fixed-income securities and alternative investments around the world. This description basically says that the fund can invest in anything that it wants, with the possible exception of options and derivatives. Ordinarily, we would expect such a fund to target total return as its objective, not current income. After all, equities in general are not very good at the provision of income. We can easily see this in the fact that the S&P 500 Index only has a trailing twelve-month yield of 1.35% and other equity indices are not much better:   Wall Street Journal The yields of the largest positions in the Calamos Global Dynamic Income Fund are also fairly low. Here are the largest positions in the fund:   Calamos Investments Here are the yields of these securities:   Asset Name Current Yield   Nvidia Corp. (NVDA) 0.02%   SPDR Blackstone Senior Loan ETF (SRLN) 8.85%   Taiwan Semiconductor Mfg (TSM) 1.21%   Invesco Senior Loan ETF (BKLN) 8.82%   Microsoft Corp. (MSFT) 0.70%   Novo Nordisk A/S (NVO) 1.37%   Eli Lilly and Company (LLY) 0.64%   Ford Motor Company (F) 0.00%   Uber Technologies (UBER) 0.00%? (See discussion below)   ASML Holding (ASML) 0.78%   Click to enlarge The Ford Motor Company holdings are the 0.000% convertible bonds maturing in March 2026. The fund does not currently disclose which Uber convertible bonds it holds. That company has a number of convertible bond issues outstanding, including one that was issued in November 2023. From the Uber press release:  Uber Technologies, Inc. today announced the pricing of an upsized offering of $1.5 billion aggregate principal amount of 0.875% Convertible Senior Notes due 2028. … The notes will be senior unsecured obligations of Uber, will bear interest of 0.875% per annum.  Those are five-year notes that were issued in November with a coupon rate of 0.875%. That offering apparently attracted a lot of interest from investors, despite having a remarkably low-interest rate for the monetary environment that existed in 2023. These may not be the convertible bonds that this fund holds, though. Other Calamos closed-end funds have significant exposure to the Uber Technologies 0.00% bonds that mature in December 2025, so it is possible that the manager simply bought the same bonds for the Calamos Global Dynamic Income Fund as well. In either case, we can see that these convertibles all have substantially lower yields than we would expect in today’s interest rate environment. In short, the only two things in the fund’s largest positions list that have anything approaching a reasonable yield are the two senior loan funds. It is very difficult to see how the fund can be trying to maximize current income with this portfolio. The provision of total return would be a more logical objective, since that is the combination of current income and capital appreciation. Based on the fund’s portfolio, its management clearly expects that capital gains will comprise the majority of the fund’s investment profits, so that would be a better objective. There have been a few changes to the fund’s portfolio since the last time that we discussed it. The most notable of these changes are that Amazon.com (AMZN), Apple (AAPL), and Alphabet (GOOGL) were removed from the fund’s largest positions list. In their place, we have the SPDR Blackstone Senior Loan ETF, the Invesco Senior Loan ETF, and Uber’s convertible bonds. The removal of the three technology companies actually addresses one of the major issues that I had with this fund the last time that we discussed it. This was because the fund was highly exposed to the richly valued and long-duration “Magnificent 7” technology stocks. That made a lot of sense in the decade preceding the pandemic, but some of these companies have struggled recently. Most notable, Apple is actually down year-to-date as it lags the other technology companies in artificial intelligence and has failed to produce much in the way of earnings growth over the past three years:   Seeking Alpha The two-year change from fiscal year 2021 to fiscal year 2023 was 2.13%, which is less than the increase in the consumer price index over the same period. All of Apple’s earnings per share growth has been driven by share buybacks, which by itself is not enough to entice investors anymore. Meanwhile, Amazon.com and Alphabet have both delivered fairly strong appreciation year-to-date:   Seeking Alpha Thus, those two companies have not faltered in the market yet, but there are many reasons to be cautious about them too given the current valuations. There is a very real probability that generative artificial intelligence will not live up to the hype that many market participants have ascribed to it, nor is there any guarantee that these two companies will be leaders in artificial intelligence. After all, Yahoo! and America Online certainly do not rule the Internet today, but they did back in 1999, so today’s leaders can be tomorrow’s laggards. Alphabet has already attracted a great deal of criticism and pushback from customers over its Gemini project, and both of these companies have started to attract attention from antitrust regulators. Thus, it could make sense for the fund to pare back its positions to these companies following the bull runs that they had. The fund’s management appears to agree, as clearly it did reduce its exposure to these companies in favor of things that benefit from high interest rates. The fact that there were obviously quite a few changes to the fund’s largest positions could lead someone to think that the Calamos Global Dynamic Income Fund has a very high turnover ratio. In fact, for the fiscal year that ended on October 31, 2023, the fund reported a 114.00% annual turnover, which is fairly high when compared to its peers:   Fund Name Portfolio Turnover   Calamos Global Dynamic Income Fund 114.00%   Clough Global Dividend and Income Fund 72.00%   Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund 90.00%   Guggenheim Active Allocation Fund 21.00%   LMP Capital and Income Fund 41.00%   PIMCO Global StocksPLUS & Income Fund 483.00%   Virtus Total Return Fund 36.00%   Click to enlarge (All figures are from the most recent annual report for each fund.) As we can clearly see, the Calamos Global Dynamic Income Fund has a much higher turnover ratio than any fund shown here, except for the PIMCO Global StocksPLUS & Income Fund. The trading expenses from this are one of the reasons why the fund’s expense ratio came in at 3.68% for the most recent fiscal year. The Calamos Global Dynamic Income Fund has not delivered a high level of performance from its trading activity. Over the past five years, the fund was outperformed by two of the funds shown above:   Seeking Alpha The top performer over the period was the LMP Capital and Income Fund by quite a lot. The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund delivered a 62.27% total return over the period, putting it firmly in second place. The Calamos Global Dynamic Income Fund was third with a 38.18% total return. All the remaining funds were at 1.50% or lower over the period, with three of them handing investors losses. Thus, the Calamos Global Dynamic Income Fund is certainly better than many other global hybrid funds, but it's very active trading strategy does not appear to improve its performance compared to a fund like the LMP Capital and Income Fund which is much less active. Leverage The Calamos Global Dynamic Income Fund employs leverage as a method of boosting the effective yield and total return that it receives from the assets in its portfolio. This is a very common strategy that is employed by many closed-end funds. I explained how this works in my previous article on this fund:  In short, the fund borrows money and then uses that money to purchase stocks, convertible securities, and bonds from issuers that are located all over the world. As long as the purchased asset delivers a higher total return than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the effective yield of the portfolio. This fund is capable of borrowing money at institutional rates, which are considerably lower than retail rates. As such, this scenario will usually be the case. It is important to note though that this strategy is much less effective today with rates at 6% than it was two years ago when rates were basically 0%. This is because the difference between the rate that the fund has to pay on the borrowed money and the return that it can get from the purchased security is much narrower than it once was. Unfortunately, the use of debt in this fashion is a double-edged sword. This is because leverage boosts both gains and losses. As such, we want to ensure that the fund is not employing too much leverage because that would expose us to an excessive amount of risk. I generally do not like a fund’s leverage to exceed a third as a percentage of its assets for this reason.  As of the time of writing, the Calamos Global Dynamic Income Fund has leveraged assets comprising 31.42% of its portfolio. This is an increase over the 28.05% leverage ratio that the fund had the last time that we discussed it, which is disappointing. The fund’s net asset value has increased by 25.79% since the previous article on it was published:   Barchart Normally, we would expect this to cause a fund’s leverage to decline. In fact, the only reason that the fund’s leverage ratio would increase along with its net asset value is if the fund’s management was actually borrowing money more rapidly than the fund’s net asset value is increasing. That is something that may be concerning at first, but it does help boost a fund’s effective returns during a strong bull market period. That appears to be what the management was trying to accomplish here, and it is one of the reasons why the fund’s performance has been so strong since the start of November 2023. Despite the fund’s increased level of debt, it is still below the one-third of assets levels that we typically like to see a closed-end fund employ. Here is how the fund’s leverage ratio compares to its peers:   Fund Name Leverage Ratio   Calamos Global Dynamic Income Fund 31.42%   Clough Global Dividend and Income Fund 28.39%   Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund 18.50%   Guggenheim Active Allocation Fund 21.71%   LMP Capital and Income Fund 19.95%   PIMCO Global StocksPLUS & Income Fund 18.09%   Virtus Total Return Fund 30.17%   Click to enlarge (All figures from CEF Data.) Here we can see that the Calamos Global Dynamic Income Fund is employing a somewhat higher level of leverage than its peers. This could suggest that the fund is overleveraged for its strategy, which would, of course, expose its investors to an outsized amount of risk. A risk-averse investor may want to take this into consideration as part of their due diligence. Personally, though, I do not really think that this fund’s leverage is too bad right now, and barring a significant market correction, it should be okay. Distribution Analysis The primary objective of the Calamos Global Dynamic Income Fund is to provide its investors with a very high level of current income. To this end, the fund pays a monthly distribution of $0.05 per share ($0.60 per share annually). This gives the fund a 9.00% yield at the current share price. Unfortunately, this fund has not been especially consistent regarding its distribution over its history:   CEF Connect As I observed previously: As we can see here, the fund has both raised and cut its distribution several times over the past several years since its inception. Most of the cuts came at a time of stock market weakness, such as the Lehman Brothers collapse, the Great Financial Crisis, and of course the termination of the Federal Reserve’s longstanding easy money policy in 2022. Thus, the fund’s distribution appears to depend to a certain degree on the overall performance of the American stock market, which makes a lot of sense considering that the fund is weighted most heavily to this particular market. However, it might still prove to be a turn-off for those investors who are seeking a safe and secure source of income to pay their bills and finance their lifestyles. After all, we do not really like our ability to support ourselves to be dependent on the performance of the stock market. The most important thing, however, is the fund’s ability to sustain its distribution at the current level. Let us take a look at the fund’s most recent financial report, which is the annual report corresponding to the full-year period that ended on October 31, 2023. This is a newer financial report than the one that we had available to us the last time that we discussed the fund, so it should still work as an update even though it is several months old at this point. For the full-year period that ended on October 31, 2023, the Calamos Global Dynamic Income Fund received $8,476,941 in interest and $6,737,275 in dividends from the assets in its portfolio. However, some of this reported interest was classified as a return of principal under an amortization schedule, so it is not considered to be investment income for tax purposes. Thus, the fund only reported a total investment income of $10,356,818 for the full-year period. This was insufficient to cover the fund’s expenses, and it ended up reporting a net investment loss of $4,968,800 for the period. Obviously, the fund could not pay its $38,318,632 distributions out of net investment income. The fund was unable to make up the difference with capital gains. For the full-year period, it reported net realized gains of $21,633,158, and it had another $13,418,308 in net unrealized gains. The fund’s net assets declined by $8,235,966 after accounting for all inflows and outflows during the period. Thus, it failed to cover its distributions for the second year in a row. As we have already seen, the fund’s net asset value has increased by quite a lot since the start of November 2023. As such, it appears that the fund has solved this problem and has earned more than enough to cover its distribution payments since the start of the current fiscal year. Valuation Shares of the Calamos Global Dynamic Income Fund currently trade at a 12.35% discount on net asset value. This is a better price than the 11.28% discount that the shares have had on average over the past month. Thus, the current entry point looks reasonably good. Conclusion In conclusion, the Calamos Global Dynamic Income Fund has delivered a very respectable performance over the past six or seven months and as such, it certainly might attract some investors, including those who are not traditionally interested in income. After all, the fund has beaten the major common equities by quite a lot over the period. The fund did fail to cover its distribution in the most recent fiscal year, but its recent strong performance appears to have solved that problem. Indeed, it would not be surprising if this fund increased its distribution before too long due to its outsized profits.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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