Calamos Investments' new closed-end fund tries to limit discount to NAV issue

Calamos Investments' new closed-end fund tries to limit discount to NAV issue
Convertible income fund timed for a rising rate environment.
MAR 31, 2015
Calamos Investments has broken the ice with the year's first closed-end fund initial public offering that includes a few tweaks designed to increase appeal among investors and financial advisers. The Calamos Dynamic Convertible and Income Fund (CCD) raised $555 million on Friday by promoting a strategy that is supposed to capture two-thirds of the upside of the S&P 500 Index performance, but only one third of the downside. The portfolio of about 80% convertible securities and 20% high-yield debt is a “play on the threat of rising interest rates,” according to Robert Behan, head of distribution at Calamos, which now has six closed-end funds with a total of more than $7 billion under management. “The thematic with this fund is a very nice healthy yield, but also participation in the general equity market through the convertible securities,” he said. With higher interest rates expected to come later this year, Mr. Behan said financial advisers are scrambling to find ways to navigate the duration risk in bond portfolios. “Our outlook is for volatile equity markets but an S&P return of between 8% and 10%,” he said. “If the Fed raises rates, the convertibles in this fund should do well, assuming the economy does well and equity prices are on the rise, because they're all fixed-income instruments with an equity option.” BOND FLOOR And if equities don't do so well, Mr. Behan added, “the convertibles work on a bond floor, which means they won't fall as far as equities.” On the downside, closed-end funds have had a tendency to start trading at a discount to net asset value shortly after the IPO is sold, almost exclusively to individual investors. Of Calamos' six funds, three are currently trading at discounts of between 5% and 9% to net asset value. That particular market reality equates to red meat to somebody like Eric Boughton, a manager of closed-end fund portfolios at Matisse Funds. “Our whole experience in closed-end funds is taking advantage of large discounts and then selling them at narrower discounts,” he said. “Generally speaking, we love discounts, but it is a sad comment on Wall Street that funds come out with large imbedded discounts.” Calamos' answer to the scenario of closed-end funds trading at discounts once they hit the open market is to install what it calls an “adviser purchase program.” As it is set up, Calamos will step in and buy shares of the fund if it trades at a discount of 2% or more between 45 and 275 days after the IPO. The other thing Calamos has introduced to add appeal to this particular fund is a 15-year limit on the life of the fund, at which point shareholders will be able vote to liquidate the fund. This is the first time Calamos has set a limit on the life of a closed-end fund.

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