Calamos Convertible Opportunities and Income Fund: High Yield with Moderate Risk
The Calamos Convertible Opportunities and Income Fund (CHI) is a closed-end fund that allows income-focused investors to receive a high level of current income without sacrificing the upside potential that can accompany an investment in common equities. The fund does this by investing in a diversified portfolio of convertible securities and high yield bonds. Its primary objective is to provide investors with a very high level of total return, and it has been successful in delivering on this goal, boasting a 10.44% yield at the current price.
However, it is important to note that this fund has a lower yield than the majority of its peers, which could be disappointing to some investors, especially those seeking a very high level of income from their portfolio. There is also a certain amount of risk that comes from funds with higher yields, as an outsized yield can be a sign that the market doubts the fund’s ability to sustain its yield going forward.
The Calamos Convertible Opportunities and Income Fund has been somewhat better at providing its investors with a stable level of income over the years. Since November 2023, when the market was just starting out on a bullish run, the fund has gained around 6.95%. This is lower than the 14.32% gain of the S&P 500 Index over the same period but is better than the 0.96% gain of the iShares Core U.S. Aggregate Bond ETF (AGG) and comparable to the performance of the iShares Convertible Bond ETF (ICVT), due to the fund’s significant weighting towards convertible securities.
When distributions are taken into account, the fund’s performance becomes even more impressive. Shareholders of the Calamos Convertible Opportunities and Income Fund have benefited from a 12.81% total return since the publication date of the previous article.
The fund’s portfolio consists primarily of convertible securities, which can provide considerable upside when the issuing company enjoys success. These securities are frequently issued by start-up companies or financially distressed companies that may have difficulty obtaining financing at a reasonable price. As their fortunes improve, these companies can deliver a strong performance in the stock market, and holders of convertible securities issued by them stand to benefit. Total return is the combination of direct payments made to investors and capital gains, so it makes sense for this fund to be targeting capital gains.
The Calamos Convertible Opportunities and Income Fund’s largest holdings include companies that are often revenue or cash-flow constrained, such as Uber Technologies, Wayfair, and Ford Motor Company. Many of these companies issued convertible securities as an alternative to conventional debt that was unaffordable.
The fund employs leverage as a method of boosting the effective yield that it receives from the assets in its portfolio. The fund borrows money at institutional rates and uses it to purchase convertible securities and high yield junk bonds, amplifying the effective yield of the portfolio. However, it is essential to understand that leverage can boost both gains and losses, so it is crucial to ensure that the fund is not employing too much leverage.
The Calamos Convertible Opportunities and Income Fund has leveraged assets comprising 36.85% of its assets, which represents a decline from the 39.25% leverage ratio it had previously. This is likely driven by the fact that the fund’s net asset value per share has increased over the period. The fund’s leverage ratio is within the acceptable range for closed-end funds, and its current level appears to represent a reasonable balance between risk and reward.
The Calamos Convertible Opportunities and Income Fund pays a monthly distribution of $0.0950 per share ($1.14 per share annually), which gives it a 10.44% yield at the current share price. It has generally paid a stable distribution over the years, with the exception of a short period from 2018 to 2021. This distribution is likely to be attractive to investors seeking a steady level of income, although the temporary distribution cut is a concern.
However, the fund’s distribution coverage has been a concern in the past. For two years in a row, the fund failed to fully cover its distributions through investment income alone. This means the fund had to rely on other sources of income, such as capital gains, to make up the shortfall. In the most recent fiscal year, the fund’s net assets increased, indicating that it has earned sufficient investment profits to cover its distributions. However, investors should continue to monitor the fund’s distribution coverage going forward.
In conclusion, the Calamos Convertible Opportunities and Income Fund offers a compelling combination of high yield, moderate risk, and potential for capital gains. It is one of the few closed-end funds with a dedicated focus on investing in convertible securities and has a relatively strong performance record. However, its premium to net asset value is currently quite high, and its distribution coverage has been a concern in the past. Investors should consider these factors carefully before investing in the fund.
