While the investing world continues to shovel money toward exchange-traded funds (ETFs) (full disclosure: I find myself using them more and more), it’s almost as if the grandfather of the ETF, the closed-end fund (CEF), has been reduced to a memory like dial phones or the Nehru jacket. But when I’m at a loss for finding value in an individual stock, I often find myself looking through CEF names like a millennial at a record shop.
CEFs can trace their origins back to the 1860s in Great Britain, when they were primarily used to raise money to build U.S. railroads. The first American CEFs appeared in 1893, 30 years prior to the first U.S. open-end mutual fund. Prior to the Crash of 1929, American CEFs claimed over $4 billion in assets, which was big money for the time.
CEFs have evolved over the decades since, but their organization and basic features have remained relatively consistent. CEFs are and always have been professionally and actively managed, exchange-traded, internally leveraged, and income oriented.
Recently, while screening a handful of CEFs, one piqued my interest: Calamos Convertible & Hi Income Fund (CHI).
As the name suggests, most of the fund’s heavy lifting is done through the use of convertible bonds, which are what is known as a hybrid security. Each bond is convertible to a pre-determined number of shares of the issuer’s common stock. This gives an investor two things: an income stream and participation in the movement of the company’s stock. Often, convertible bonds are issued by high-growth companies whose common stock does not pay a dividend.
The fact that the fund is managed by Calamos Investments was the attention grabber. Founded in 1977 by John Calamos, Sr., the firm became one of the investing world’s premier convertible bond managers. I had the pleasure of meeting Mr. Calamos at a conference a few years back.
Knowing the fund was managed by a true authority, I looked under the hood. 37.9% of the fund, naturally, is made up of convertible bonds while 16.4% is convertible preferred stocks.
But what really excited me was the sector allocation.