Advent Claymore Convertible Securities Is Good For A Swing Trade

| About: Advent Claymore (AGC)
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Summary

The 13% discount to NAV is currently much higher than normal.

The discount to NAV has varied considerably in the past. AGC traded at a premium in 2010 and 2011.

The fund is partially hedged by writing call options and is well diversified.

The Advent/Claymore Convertible Securities and Income Fund II (NYSE:AGC) is a leveraged closed-end fund that was formed in May 2007. AGC seeks total return from current income and capital appreciation. The fund invests at least 80% of the portfolio in convertible securities or non-convertible income securities from US and non-US issuers:

  1. At least 50% of managed assets in convertible securities
  2. Up to 40% in non-convertible income securities
  3. Portion invested in foreign securities may vary over time
  4. Writes covered call options on up to 25% of the portfolio. The fund pays a managed distribution.

The fund uses leverage and may invest in securities of any credit quality including securities below investment grade (e.g. junk bonds or high yield).

This is the asset class breakdown as of Oct. 31, 2014:

Asset Class Breakdown (10/31/2014)

Convertible

63.08%

High Yield

29.49%

Equity

5.08%

Cash

2.54%

Because it was issued in 2007, AGC got off to a rocky start. It was hit very hard in 2008, and has had mediocre long term performance since then. But it has been a good trading vehicle, since there have been large variations in its discount to net asset value. For periods in 2010 and 2011, the fund traded at a premium over NAV, and its discount is usually below 10%.

I see AGC as an attractive intermediate-term swing trade here, rather than a long-term investment. Here is a chart showing how the discount to NAV has varied considerably over the last five years. Note the premium over NAV that developed in 2010 and 2011.

Here is the total return NAV performance record since inception:

2007

(partial year)

-4.50%

2008

-57.84%

2009

+53.54%

2010

+15.82%

2011

-19.10%

2012

+14.66%

2013

+22.54%

YTD

-4.78%

US/International Allocation (as of October 31, 2014)

United States

65.81%

International

34.19%

Sector Concentration (as of October 31, 2014)

Financial

16.76%

Technology

14.45%

Healthcare

13.70%

Consumer Discretionary

12.87%

Industrials

11.90%

Energy

11.37%

Materials

7.04%

Media

6.70%

Consumer Staples

2.12%

Telecommunications

1.68%

Utilities

1.23%

Transportation

0.18%

Credit Quality (as of October 31, 2014)

A

2.19%

BBB/Baa

9.71%

BB/Ba

17.89%

B

20.25%

Below B

5.62%

Not Rated

44.34%

Fund Management

Advent has managed convertible securities since inception in 1995. It has managed high-yield securities opportunistically in its convertible strategies and has managed a dedicated high-yield convertible strategy. Advent/Claymore was acquired by Guggenheim Investments in 2009.

Here are some summary statistics on AGC:

Advent/Claymore Global Convertible Securities Income Fund

  1. Total Assets: 412.5 Million Total Common assets: 242.5 Million
  2. Annual Distribution (Market) Rate= 8.65%
  3. Last Regular Monthly Distribution= $0.047 (Annual= $0.564)
  4. Fund Expense ratio: 1.94% Discount to NAV= -13.30%
  5. Portfolio Turnover rate: 239%
  6. Percent Leveraged: 41.22% (1.74% interest rate)
  7. Average Daily Volume (shares)= 108,000
  8. Average Dollar Trading Volume = $700,000

AGC is currently selling at a discount to NAV of -13.30% compared with the 6-month average discount of -10.24%. The 1-Year Z-Statistic is -1.69. This means the current discount to net asset value is almost two standard deviations below the one year mean.

AGC is a moderately liquid stock and usually trades with a bid-asked spread of only a penny, but with fairly small lot sizes available on the bid and asked. I believe AGC has been hurt recently by some of their energy holdings, but may be an attractive purchase at the current price level with the possibility of a narrowing discount and price increase next year.

Disclosure: The author is long AGC.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.