CGO: This Excellent CEF Is Taking Advantage Of Foreign Opportunities

seekingalpha08-30

The Calamos Global Total Return Fund offers a high level of income and inflation protection through a diversified portfolio of equities and convertible bonds.The fund's 8.34% yield and potential for ...

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01:44 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717958-cgo-this-excellent-cef-is-taking-advantage-of-foreign-opportunities><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The Calamos Global Total Return Fund offers a high level of income and inflation protection through a diversified portfolio of equities and convertible bonds.The fund's 8.34% yield and potential for ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717958-cgo-this-excellent-cef-is-taking-advantage-of-foreign-opportunities\">Source 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ACC"},"translate_title":"CGO：这个优秀的CEF正在利用国外机会","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ACWI":1,"URTH":1,"SCD":1,"NMAI":1,"GUG":1,"GLO":1,"ETO":1,"CGO":1,"CEF":1,"03145":0.6},"content_text":"The Calamos Global Total Return Fund offers a high level of income and inflation protection through a diversified portfolio of equities and convertible bonds.The fund's 8.34% yield and potential for share price appreciation make it attractive, despite a lower yield compared to peers.The fund appears to have been able to take advantage of recent strength in TSM, which it would not have been able to do without the foreign exposure.The fund's leverage is a bit higher than its peers, but it has managed to handle it well historically.Trading at a slight discount to NAV, the fund is a solid choice for income-seeking investors looking for international diversification and inflation protection.   Richard Drury The Calamos Global Total Return Fund (NASDAQ:CGO) is a closed-end fund that income-seeking investors can employ to earn a high level of income from the assets that they already possess. As is the case with most Calamos funds, this one includes exposure to equities and convertible bonds, which provide a certain level of protection against inflation. As I explained in a previous article: One of the nice things about this fund is that it invests in equity securities, so it provides a certain amount of protection against inflation, which may be a bigger problem going forward than it has been in the past. After all, the projections for large fiscal deficits are well known, and it is difficult to see any way for these deficits to be funded by any method apart from the creation of new currency. Historically, equities, real estate, and gold have been the best ways to preserve the purchasing power of your money against inflation. In the article that I just linked, I showed how inflation is far from beaten. The year-over-year growth in the consumer price index is down from where it was two years ago, but the consumer price index itself is a flawed measurement due to the fact that it includes numerous judgments and adjustments that may not be reflective of reality. Technically, inflation is the growth of the money supply in excess of the actual output of goods and services in an economy. As we can see here, the M2 money supply has increased over the past year:   Federal Reserve Bank of St. Louis The fact that this happened while the “official” inflation rate was higher than the Federal Reserve’s target could be a sign that more inflation is on the way. However, at least for now, M2 growth over the past year has been less than real gross domestic product growth over the same period. As already mentioned though, the consumer price index is a flawed measure due to the fact that it is not a straight price index, and this may result in real gross domestic product growth being overestimated. In short, though, investors should not assume that inflation is “beaten” and should construct their portfolios to include assets that help preserve their purchasing power. The assets that are included in the Calamos Global Total Return Fund may help accomplish this task. The fund does not leave income investors disappointed, as already stated. As of the time of writing, the fund yields 8.34%. This is certainly not bad considering that the S&P 500 Index (SP500) only yields 1.31% today, but it is not especially attractive when compared to the fund’s peers:   Fund Name Morningstar Classification Current Yield   Calamos Global Total Return Fund Hybrid-Global Allocation 8.34%   Clough Global Opportunities Fund (GLO) Hybrid-Global Allocation 10.89%   Eaton Vance Tax-Advantaged Global Opportunities Fund (ETO) Hybrid-Global Allocation 8.00%   Guggenheim Active Allocation Fund (GUG) Hybrid-Global Allocation 9.08%   LMP Capital and Income Fund (SCD) Hybrid-Global Allocation 8.30%   Nuveen Multi-Asset Income Fund (NMAI) Hybrid-Global Allocation 12.47%   Click to enlarge This might be somewhat disappointing for those investors whose primary goal is to earn a very high level of income from the assets in their portfolios. However, it is not unusual for a Calamos fund to have a lower yield than many of its peers. Many funds from this fund house tend to trade at either a very small discount or even a premium and this drags their yields down compared to peers that trade with large discounts. The two Calamos funds that include “Total Return” in their name also tend to deliver some share price appreciation over time, which supplements the yield. However, for an investor who just wants to maximize their incomes, some of the peer funds might be closer to what they need. As regular readers might remember, we previously discussed the Calamos Global Total Return Fund in early June of this year. The global equity markets have generally been fairly strong since that time, helped along by interest rate cuts in a few developed nations and expectations that the Federal Reserve would shortly join in. Chairman Powell’s speech at Jackson Hole last week largely verified this, although the markets have been pricing in a September interest rate cut for months now. As such, we can probably assume that the fund itself has delivered a respectable performance since our previous discussion. This is certainly the case, as shares of the Calamos Global Total Return Fund have appreciated by 7.77% since our previous discussion. This was quite a bit better than the performance of the S&P 500 Index and the MSCI World Index (URTH) over the same period:   Seeking Alpha This fits in with the earlier statement that I made about Calamos funds typically performing reasonably well when it comes to share price. It also seems likely to appeal to any investor, with the possible exception of one whose only objective is to maximize their income. However, most people are happy just beating the broader market, and this fund certainly managed to deliver on this. The fund actually did a lot better during the period than this share price performance suggests. As I stated in the previous article: A simple look at the fund’s price performance over a given period does not provide an accurate picture of how the fund’s investors have actually done. This is because closed-end funds such as the Calamos Global Total Return Fund typically pay out most or all of their investment profits to the shareholders in the form of distributions. The basic objective is to keep the portfolio’s assets at a relatively consistent level while giving the investors all of the profits earned by the portfolio. This is the reason why these funds tend to have much higher yields than just about anything else in the market. It also means that investors always do better than the share price performance alone would suggest, as the distribution provides a return in excess of any appreciation in the share price. As such, we should consider the distributions paid out by the fund in a discussion of its performance. When we include the fund’s distributions that were paid since mid-June in the chart above, we get this alternative performance chart:   Seeking Alpha There are very few investors who would actually complain about this performance. As we can see, the Calamos Global Total Return Fund came very close to doubling the performance of the MSCI World Index or the S&P 500 Index over the past two-and-a-half months. While its yield is lower than many of its peers, most investors would be more than happy with this performance. As just stated, roughly two-and-a-half months have passed since our previous discussion on this fund. During that time, there have been a few changes, including the release of the fund’s semi-annual report. This report is something that we naturally want to look at in order to ensure that the fund can sustain the distribution that it pays out. We will also have a look at any changes that the fund may have made to its portfolio over the past few months, as this will have an effect on its performance going forward. The remainder of this article will be focused on this. About The Fund According to the fund’s website, the Calamos Global Total Return Fund has the primary objective of providing its investors with a high level of total return. This makes a lot of sense given the fund’s name. It also works well with the fund’s strategy, which is explained in great detail in its most recent prospectus:  Under normal circumstances, the Fund will invest primarily in a portfolio of common and preferred stocks, convertible securities and income producing securities such as investment grade and below investment grade debt securities. The Fund, under normal circumstances, will invest at least 50% of its managed assets in equity securities (including securities that are convertible into equity securities). The Fund may invest up to 100% of its managed assets in securities of foreign issuers, including debt and equity securities of corporate issuers and debt securities of government issuers, in developed and emerging markets. Under normal circumstances, the Fund will invest at least 40% of its managed assets in securities of foreign issuers. The Fund will invest in the securities of issuers in several different countries throughout the world, in addition to the United States. Calamos will dynamically allocate the Fund’s investments among multiple asset classes (rather than maintaining a fixed or static allocation), seeking to obtain an appropriate balance of risk and reward on a long-term basis through all market cycles using multiple strategies and combining them to seek to achieve favorable risk adjusted returns.  As we might expect from the fund being classified as a “Hybrid-Global Allocation” fund, the Calamos Global Total Return Fund invests in both equities and debt securities, as well as things like convertible bonds that are similar to both. The fund can also sell covered call options against 33% of its portfolio as a way to generate income or reduce its risks (due to the received premiums reducing the effective losses in a market decline), but it does not have to do that, and this is not a core part of the fund’s strategy like it is for an option-income closed-end fund. This description might lead someone to believe that this fund can largely invest in whatever its management wants, and this is true to a point. However, there are still a few restrictions and rules that we can generally expect, will be true. These are as follows:  At least half of the fund’s assets will be in either equities or convertible bonds, No more than 60% of the fund’s assets will be invested in securities issued by entities located in the United States.  I will admit that I like both of these rules. The fact that the fund will be mostly invested in equities (or securities that can be converted into equities) is quite attractive as an inflation hedge. As mentioned in the introduction, I suspect that inflation will be a very real problem over the long term, so owning things that maintain their purchasing power is critical. The fact that this fund should have a significant proportion of its assets invested outside of the United States is also nice to see due to the fact that most American investors are too heavily exposed to their home country, which could present risks that can be easily avoided by diversifying internationally. Currently, the MSCI All-Countries World Index (ACWI) has a 64.22% weighting to the United States, so if this fund will generally have less than that, then it should work reasonably well as an international diversifier. Of course, in order for any part of this thesis to work as planned, the fund must follow its rules. As we have seen in some previous articles about other closed-end funds, sometimes that is a problem. Therefore, let us have a look at this fund’s portfolio to see if the fund is investing its assets as it claims to. The fund’s semi-annual report provides the following asset allocation as of April 30, 2024:   Asset Type % of Net Assets   Corporate Bonds 12.9%   Convertible Bonds 29.3%   Bank Loans 7.0%   Warrants 0.0%   Common Stocks 80.7%   Preferred Stocks 0.1%   Exchange-Traded Funds 7.7%   Convertible Preferred Stocks 1.7%   Purchased Options 1.3%   Written Options -0.1%   Click to enlarge The fund is definitely fulfilling its promise to invest the majority of its assets in equities and in securities that can be converted into common equities. The four things above that fit that description are convertible bonds, common stocks, warrants, and convertible preferred stocks. The purchased options are actually purchased call options, so they could probably fit that description as well. These assets together represent 111.70% of the fund’s net assets (113% if we include the purchased call options), which works out to 79.39% of the fund’s total assets. That is well above the 50% of assets that was promised in the prospectus, and it is high enough that we can treat this fund largely as part of the equity exposure in our portfolios. It is important to note though that if equities ever become less attractive in the future, such as what may happen immediately prior to or during a recession, then this allocation could decline as the fund’s assets are shifted into safer fixed-income securities. The fund’s website breaks down the securities in the portfolio by country of origin. Here is that breakdown:   Calamos Investments This also complies with the rules laid out in the prospectus. In fact, this fund has well below the 60% American allocation that it is technically allowed. That is surprising, but it is also nice to see. As I already pointed out, this fund’s American allocation is significantly below that of the MSCI All-Countries World Index as well as most other broad global indices. As such, it should prove quite useful to any investor who is seeking to improve their international diversification. After all, as this fund’s domestic allocation is lower than that of the major indices (and indeed most other global closed-end funds), then the math states that including it in a portfolio with other global active or indexed funds should reduce the weighting of the United States across the portfolio in aggregate. This is very nice to see. Interestingly, we see that the fund’s weighting to the United States has not changed at all in the past three months. In the previous article, I showed the fund’s country of origin weightings as of May 31, 2024. At that time, 54.1% of the portfolio’s assets were invested in the United States. That is still the case today. However, we do see that the fund’s weighting to a few other countries has changed. These changes are summarized in this chart:   Country Allocation as of May 31, 2024 Allocation as of July 31, 2024 % Change   United States 54.1% 54.1% 0.0%   India 6.6% 6.5% -0.1%   China 5.0% 5.1% +0.1%   Taiwan 3.9% 4.9% +1.0%   Japan 3.7% 3.3% -0.4%   Canada 3.4% 3.4% 0.0%   South Korea 2.9% 3.3% +0.4%   United Kingdom 2.5% 2.9% +0.4%   Denmark 2.2% >1.9% See below   Italy 2.2% >1.9% See below   Netherlands >2.2% 2.0% See below   France >2.2% 1.9% See below   Click to enlarge The exact change for the last four countries is uncertain. The fund’s weighting to both Denmark and Italy declined by more than 0.3%, as that is the amount that would be needed to remove both nations from the chart. The Netherlands and France both had a weighting of less than 2.2% back in May, and they still do, so it is uncertain whether or not those weightings actually changed at all. One significant change that we see here is that the fund’s weighting to Taiwan increased dramatically over the past three months. This might be due to the very strong performance of Taiwan Semiconductor Manufacturing (TSM), which is currently the largest holding in the fund. Over the period lasting from May 31, 2024, to July 31, 2024, shares of Taiwan Semiconductor appreciated by 9.77%, significantly outperforming both the S&P 500 Index and the MSCI World Index over the period:   Seeking Alpha The reason for this is pretty obvious, as Taiwan Semiconductor Manufacturing is the largest manufacturer of semiconductor processing chips in the world, and these chips are needed to produce the server processing units upon which generative artificial intelligence depends. As some readers know, I suspect that generative artificial intelligence will fail to live up to the hype surrounding it right now, but that does not mean that we cannot make a profit from the bubble. Calamos funds in general tend to trade the market swings and ride trends, so it makes sense that a fund like this would try to take advantage of the strong recent stock performance of Taiwan Semiconductor Manufacturing. It is worth noting that Taiwan Semiconductor Manufacturing is not the only Taiwanese asset held by this fund. Taiwan Semiconductor Manufacturing only accounts for 3.1% of the fund’s assets today, but its weighting to Taiwan is 4.9%. Thus, there are other things held by the fund, accounting for the remaining 1.8% of total assets. However, it does seem likely that at least a significant portion of the increase in the weighting that we see to that company is due to the aforementioned strong performance. Leverage As is the case with most closed-end funds, the Calamos Global Total Return Fund employs leverage as a method of boosting the effective yield and total returns generated by the assets in its portfolio. I explained how this works in my previous article on this fund:  Basically, the fund is borrowing money and using that money to purchase fixed-income assets, common stocks, and other income-producing securities. As long as the purchased assets provide 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. As this fund is capable of borrowing money at institutional rates, which are significantly lower than retail rates, that will usually be the case. Unfortunately, the use of debt in this fashion is a double-edged sword because leverage boosts both gains and losses. As such, we want to ensure that a fund is not employing too much leverage because that would expose us to too much risk. I usually do not like to see a fund’s leverage exceed a third as a percentage of its assets for that reason.  As of the time of writing, the Calamos Global Total Return Fund has leveraged assets comprising 31.80% of its overall portfolio. This is an improvement over the 32.19% leverage that the fund had the last time that we discussed it, which is unsurprising. After all, as we saw in the introduction, the fund’s share price appreciated by 7.77% since the publication date of the previous article. Normally, that would mean that the portfolio also got larger, which reduces leverage. However, I will admit that we would expect the fund’s leverage to have decreased by much more than 0.39% given the share price increase. As has been the case with many closed-end funds recently, the share price appreciated by much more than is justified by the fund’s performance over the past two-and-a-half months. This chart shows the fund’s net asset value since the publication date of my previous article on this fund:   Barchart As we immediately see, the fund’s share price only increased by 1.27% over the period in question. This is far less than the share price has appreciated, which strongly suggests that this fund’s valuation is not as attractive as it was a few months ago. We will discuss this in more detail later. For now, though, we can see that the fund’s portfolio did increase in size over the period, which explains the reduction in its leverage. In the previous article, we saw that this fund has a fairly high level of leverage relative to its peers. This appears to still be the case today, as we can clearly see here:   Fund Name Leverage Ratio   Calamos Global Total Return Fund 31.80%   Clough Global Opportunities Fund 30.48%   Eaton Vance Tax-Advantaged Global Opportunities Fund 19.12%   Guggenheim Active Allocation Fund 25.25%   LMP Capital and Income Fund 19.06%   Nuveen Multi-Asset Income Fund 28.47%   Click to enlarge (all figures from CEF Data) As we can clearly see, the Calamos Global Total Return Fund has a substantially higher level of leverage than any of the peer funds. This could be a sign that the fund is using too much leverage for its strategy. With that said, the fund is below the one-third of assets maximum leverage that we ordinarily prefer. Its historical performance is also fairly good, so it is tough to complain about the fund’s use of leverage. Investors who are more risk-averse may have some reservations here, but personally, I think it is probably okay. Distribution Analysis The primary objective of the Calamos Global Total Return Fund is to provide its investors with a very high level of total return. However, as is the case with most closed-end funds, it delivers the bulk of its total return via distributions paid to its investors. To this end, the fund pays a monthly distribution of $0.08 per share ($0.96 per share annually). This gives the fund an 8.34% yield at the current share price. The fund has been pretty consistent with respect to its distribution in the past, but it has unfortunately fallen off a bit in recent years:   CEF Connect As I stated in the previous article: This payment history might appeal to those investors who are seeking to earn a safe and consistent income from the assets in their portfolios. The distribution cut in 2022 might be a bit annoying, but most funds had to cut their payouts following the market decline in that year. It is generally best when a fund cuts its distribution rather than maintains it at a level that is destructive to net asset value because such net asset value destruction does not tend to be sustainable over extended periods. Perhaps the biggest problem here may be that the fund’s distribution remains stable rather than grows with the passage of time, so it does not allow investors dependent on the distribution to maintain their purchasing power. Of course, most closed-end funds have that problem, and it is fairly easy to overcome by simply reinvesting some portion of the distributions that are received. The Calamos Global Total Return Fund recently released an updated financial report, so let us see if its distribution coverage has improved from the previous fiscal year. As of the time of writing, the most recent financial report corresponds to the six-month period that ended on April 30, 2024. A link to this report was provided earlier in this article. This is a much newer report than we had previously, so it should work quite well for an update. For the six-month period that ended on April 30, 2024, the Calamos Global Total Return Fund received $1,205,983 in interest and $822,807 in dividends from the assets in its portfolio. The fund had to pay out some of this money as foreign withholding taxes. In addition, some of the received interest was actually an amortization of principal and is not considered to be investment income for tax purposes. Thus, the fund only reported a total investment income of $1,448,292 for the period. This was not sufficient to cover the fund’s expenses, and it ended up reporting a net investment loss of $736,308 for the period. Obviously, that was not enough to cover the $4,716,402 that the fund paid out in distributions over the six-month period. Fortunately, the fund was able to make up the difference via capital gains. For the six-month period that ended on April 30, 2024, the Calamos Global Total Return Fund reported $10,820,156 in net realized gains and $13,218,200 in net unrealized gains. Overall, the fund’s net assets increased by $18,585,574 after accounting for all inflows and outflows during the period. We can clearly see that the fund’s net realized gains alone were more than enough to completely offset the net investment loss, cover the distribution, and leave the fund with a significant amount of money left over. Once we add the net unrealized gains to the total, it becomes fairly obvious that this fund should have no trouble maintaining its current distribution for quite some time. In fact, it should be able to increase it and still be in good shape. Thus, we should not need to worry about the distribution at all as it is very well covered. Valuation Shares of the Calamos Global Total Return Fund are currently trading at a 3.34% discount to net asset value. This is slightly more attractive than the 2.90% discount that the fund’s shares have had on average over the past month. The current share price does represent a discount to net asset value, so it is not a horrible price to pay for the fund. However, it is a very narrow discount, so it is a good idea to double-check the net asset value per share before making a purchase as market action could easily swing this fund to a premium. Conclusion In conclusion, the Calamos Global Total Return Fund is a very good closed-end fund for anyone who is seeking income and international diversification. The fund continues to be underweight to the domestic markets relative to the major indices, and it appears that this has allowed it to take advantage of some recent opportunities involving foreign stocks. We also see a great deal of improvement in the fund’s distribution coverage, and that could position it well to reward investors going forward. The only downside here is that the fund’s discount has narrowed compared to the levels that it has had in the past, so investors are not getting as good a deal here as they used to be.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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