Gabelli Convertible & Income Securities Fund: An Attractive Higher Yield Convertible Fund

Summary

  • GCV is another fund that is offered under the Gabelli fund sponsor, the others being BCV and ECF.
  • This one is slightly different from BCV and ECF in that it also includes Mario Gabelli himself as a manager.
  • Despite that, the other managers are the same and there is quite a bit of overlap in the portfolio.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

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Written by Nick Ackerman, co-produced by Stanford Chemist

Gabelli offers several different closed-end funds, ranging from different focuses and investments across various asset classes. The Gabelli Convertible & Income Securities Fund (NYSE:GCV) is one of three funds that focuses on convertible securities. The others being Bancroft Fund (BCV), that we covered recently, and Ellsworth Growth & Income Fund (ECF), which we also covered recently.

There are some minor differences between these three funds. ECF, for example, carries a bit of exposure to equity positions. BCV has hardly any, and GCV itself carries a bit in the middle with roughly 9% in equity positions. ECF at around 15% and BCV at less than 2% as of all their latest reports.

Another difference is that Mario Gabelli is listed as a manager in the case of GCV - with the other two notably not including the "Gabelli" title in their names. This is because BCV and ECF weren't originally a part of the Gabelli offering. The Dinsmore family offered them, and they are still listed as managers today after joining Gabelli Funds.

A bit more about Thomas Dinsmore and James Dinsmore can be found in the annual report of the funds:

Thomas H. Dinsmore, CFA, joined Gabelli Funds, LLC in 2015. He currently serves as a portfolio manager of Gabelli Funds, LLC and manages several funds within the Fund Complex. Previously Mr. Dinsmore was Chairman and CEO of Dinsmore Capital Management; CEO and Portfolio Manager of Bancroft Fund Ltd; and CEO, Portfolio Manager, and co-founder of Ellsworth Growth and Income Fund Ltd. He received a BS in Economics from the Wharton School of Business and an MA degree in Economics from Fairleigh Dickinson University.

Finally, another critical difference for income investors is the distribution policy. GCV pays a quarterly distribution as the other two sister funds do. However, it is a "level" distribution with an 8% minimum annual distribution target. The others have a 5% annual minimum. Those minimums are achieved through smaller, regular quarterly distributions and then topped off at the end of the year. Instead, GCV regularly just pays out significantly all of its target through the regular distribution.

Chart
Data by YCharts

With those differences highlighted, I would ultimately say that whichever is at the deepest discount will typically be the best fund worth buying of the three. However, they aren't perfectly comparable in terms of historical performance. GCV is the laggard of the group, which we can touch on below. All of them have a long history with inceptions pre-1990. BCV being the oldest coming to market in 1971, ECF in 1986, and GCV in 1989.

GCV's investment objective is to "seek a high level of total return on its assets." They will attempt to achieve that objective by a "disciplined approach to investing in convertible securities and other debt or equity securities that are periodically expected to accrue or generate income." They also mention that their "goal is to generate consistently positive inflation-adjusted returns."

The fund is relatively small, with just $157 million in total managed assets. GCV utilizes leverage, and currently, that comes to roughly 21.50%. The leverage comes in the form of a preferred offering that is pretty typical with Gabelli's funds. It is a 4% Series E Cumulative Preferred offering. This is an expensive form of leverage but also comes with some greater flexibility and a fixed rate.

The expense ratio, including leverage, comes to 2.74%. This is on the more expensive side. This could be due to the size of the fund and the costly form of leverage relative to other CEFs.

(Source)

Performance - Discount Running A Bit Rich

As I mentioned previously, GCV is the underperforming fund of the three touched on. That being said, over the last year, the performances have been quite close.

Chart
Data by YCharts

However, when we start to move out to the 3, 5 and 10-year performance metrics, that is when we see GCV start to falter. What is more interesting here is the 3 and 5 year time frames as well. This is because it would have fully reflected when the Dinsmore managers joined Gabelli. Below is the chart of the 5-year total return performances on both share price and NAV.

Chart
Data by YCharts

It is also important to note that past returns don't guarantee future results. Looking back, we can see that most of the outperformance began last year in the 2020 market crash. To put this into better context, it seems like GCV underperformed during the February 19th, 2020, to March 23rd, 2020, time frame. That marks the peak to trough period.

Chart
Data by YCharts

This could have been due to slightly different portfolios but also having a bit more leverage.

Over the history of the fund, it has enjoyed several occasions of trading at a premium valuation. The most recent time was in 2019. However, throughout most of 2001 to 2015, the fund had frequently traded at premiums.

If we look back at that longer-term history, we could argue that GCV is certainly looking like a relative value in terms of gauging against itself. However, when looking at ECF, I would say that it appears to be the better value at this time.

Chart
Data by YCharts

ECF had performed better on a YTD total NAV return basis, with its price being the laggard. That has resulted in ECF's discount widening. Additionally, BCV has an N-2 on file that we explored last time we covered the fund. It is worth noting that GCV also has an N-2 on file and has previously conducted rights offerings. For BCV, that could mean a headwind in the short term for disruptions to its share price. Overall, the convertible space just hasn't been a hot area of the market as it was in 2020.

That being said, if we look back, historically, ECF has always traded at a discount compared to GCV. That leaves it in the much tougher situation to call the better deal. On an absolute basis, ECF is the value. On a relative basis, GCV is. In my personal opinion, I would go with ECF if I was forced to choose.

Chart
Data by YCharts

Distribution - Relying On Capital Gains

The distribution currently works out to 7.66%. On a NAV basis, this is 7.33%. That is quite an appealing rate, and I could see why an investor would favor GCV over BCV and ECF. GCV has maintained a fairly regular distribution since 2009.

(Source - CEFConnect)

However, for the Q4 distribution in 2016, it appears as though it was reduced. This is reflected on Seeking Alpha as well. What is quite strange is that when you go to their document archive, that announcement is missing.

It goes from February 23rd, 2017's announcement...

(Source - Fund Website)

...to the August 17th, 2016 announcement without the usual November announcement.

(Source - Fund Website)

All three of these funds will rely on capital gains to fund their distributions. The convertible securities they invest in just don't pay hardly anything in a low-interest rate world. That being said, due to GCV's higher expense ratio, they actually show a net investment income [NII] loss.

It gets a bit complicated here as well. The other funds produce just enough to cover their preferred dividends but not much more. In this case, GCV's preferred dividends are listed as an expense. That is what increases the expense ratio so much more.

I'll try to explain this better by showing GCV and ECF's latest reports.

(Source - Semi-Annual Reports)

What we see here is the latest Semi-Annual Reports for each fund, GCV and ECF. For GCV, we know the interest expenses are clearly listed; for ECF, it is missing. Instead, the ECF preferred distributions are listed under the "Statements of Changes in Net Assets Attributable to Common Shareholders."

For GCV, it is missing there because it was already subtracted on the expenses line. That is some of the difference. However, even after this, BCV and ECF have enough NII to cover their preferred distributions. For GCV, they don't, which just means that they rely on capital gains even further is ultimately my main point here.

(Source - GCV Semi-Annual Report)

Last year realized appreciation was enough to more than cover the distribution. This year, throughout the first half of their fiscal year, it would also appear they have realized enough gains to cover their distribution as well.

The bulk of their distributions were classified as long-term capital gains. However, some are characterized as NII despite the negative figure, which is always interesting. They also classified 42.73% of the ordinary income being classified as qualified dividends. That means a reduced tax obligation for shareholders.

(Source - Tax Breakdown)

Holdings - Heavier Tech Positioning

GCV has a bit of overlap with BCV and ECF. That could help explain the similar performance that we've seen over the last year. This is another convertible fund that is overweight in the tech space. However, they classify it as the "computer software and services" sector.

(Source - Fact Sheet)

This allocation puts GCV just slightly heavier into the sector than the other two funds. As touched on above, the fund doesn't carry a large percentage to equity positions. As of June 30th, 2021, they had approximately 9% of their portfolio in common stocks.

(Source - Semi-Annual Report)

The top holdings for the fund account for 17% of the fund's portfolio. That leaves plenty of diversity amongst their holdings. CEFConnect reports 163 total positions. The holdings are as of June 30th, 2021; with GCV being fairly active, we should expect some changes. The fund last reported a portfolio turnover of 20% for the last 6-months. Last year they reported a 44% turnover, so it is set to come around a similar figure this year if extrapolated.

(Source - Fact Sheet)

The coupon rates for some of their convertible positions are some of the higher ones that we've seen lately. Many issues in this low rate environment can get away with 0% interest rates. On the other hand, there are positions such as Coupa Software (COUP) with its 0.125% convertible coupon. They also hold another COUP position that yields 0.375%. Both of these being on the lower end, essentially meaning the upside is really tied to the chance that COUP's share price appreciates.

With interest rates set to rise in the future, one might be interested to know how it could impact convertible bonds. We know that convertible securities take on characteristics of both stocks and bonds. They participate in the upside of equity positions due to appreciation potential when they convert to common shares. However, they also pay a fixed coupon until that date. Even further, they have the downside protection or a "floor" if the equity declines too far. Investors should still receive the face value back for their convertible security at maturity.

Overall, what tends to be more important is the underlying equity positions move rather than interest rates. In a recent publication, Calamos shows that convertible securities have tended to correlate closer to equity securities rather than bonds. That should mean that convertible securities won't have the same interest rate risks that traditional bonds do. However, it can be impacted some.

(Source - Calamos Publication)

In 2020, that didn't seem to be a problem as the stock blasted higher. In 2021, it has been more reflective of the overall convertible securities market - and that might be best summed up as "challenged." COUP is a "cloud-based business spend management platform." They "connect organizations with suppliers globally; and provide visibility into and control over how companies spend money, optimize supply changes, and manage liquidity, as well as enables businesses to achieve savings that drive profitability."

Chart
Data by YCharts

Some of the overlapping positions here include Broadcom Inc (AVGO), MercadoLibre Inc (MELI), InterDigital Inc (IDCC) convertible positions; there is also the Crown Castle International (CCI) common equity position in both GCV and BCV. However, these are just the "tip of the iceberg," so to speak, with comparisons among the top ten holdings. Underneath, they are likely to overlap on several other positions.

Conclusion

GCV might seem like a reasonably attractive convertible fund as its results over the longer term have been reasonable. They pay a fairly attractive distribution and have frequently traded at premiums historically while trading at a discount at this time. However, it seems as though ECF is really the convertible fund of the trio that might be worth exploring at this time. Until a wider discount potentially opens up, I just see the valuation in ECF as the better candidate. That being said, with BCV and GCV primed for a potential rights offering, that might provide an opportunity in the future.

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This article was written by

Nick Ackerman profile picture
10.22K Followers
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields
Nick Ackerman is an avid student of the markets and has been investing in his own accounts for over 12 years. He is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. Since then he has continued with his passion for investing through writing for Seeking Alpha, providing his knowledge, opinions, and insights of the investing world. His specific focus is on closed-end funds as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long term financial goals.

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Disclosure: I/we have a beneficial long position in the shares of ECF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was originally published to members of the CEF/ETF Income Laboratory on September 29th, 2021.

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