NCZ: Virtus AllianzGI Is Not Doing Well Here
Summary
- The AllianzGI Convertible & Income Fund II primarily invests in convertible securities and non-convertible high-yield bonds rated below investment grade.
- While some Virtus AllianzGI FI funds include equities, investors liking the manager should consider their other funds before NCZ. A list is provided at the end of this article.
- Even investors not tied to Virtus AllianzGI should look elsewhere, as better Convertible funds are available. Some tickers are provided.
- Looking for more investing ideas like this one? Get them exclusively at Hoya Capital Income Builder. Learn More »
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(This article was co-produced with Hoya Capital Real Estate)
Introduction
While most fund reviews I see on Seeking Alpha and other investment sites talk about what to own, the best performers, this article does not. With all the funds out there, I think there is value in narrowing the field by highlighting ones that might not be the "best choice" in the asset class/sector they invest in.
Virtus AllianzGI is the lead manager on six Closed-End-Funds, five of which have some allocation to convertible securities. Unfortunately, the AllianzGI Convertible & Income Fund II (NYSE:NCZ), nor its sister CEF, the AllianzGI Convertible & Income Fund (NCV) are delivering to investors what they expect. That's why I have a Sell rating on NCZ (and NCV) as there are better choices even within the Virtus AllianzGI family of funds.
Understanding The AllianzGI Convertible & Income Fund II
Seeking Alpha describes this CEF as:
AllianzGI Convertible & Income Fund II is a closed ended fixed income mutual fund launched and managed by Allianz Global Investors Fund Management LLC. The fund is co-managed by Allianz Global Investors U.S. LLC. It invests in fixed income markets of the United States. The fund primarily invests in convertible securities and non-convertible high-yield bonds rated below investment grade. NCZ started in 2003.
Source: seekingalpha.com NCZ
The managers list the following as NCZ's investment objectives:
- The Fund seeks total return through a combination of capital appreciation and high current income.
- Invests in a diversified portfolio of domestic convertible securities and high-yield bonds rated below investment grade.
- Seeks to invest at least 50% of its portfolio in convertibles, but determines its allocation based on changes in equity prices, changes in interest rates, and other economic and market factors.
- For the convertible portion, Allianz Global Investors seeks to capture the upside potential of equities with potentially less volatility than a pure stock investment.
- In searching for investment opportunities, the manager looks for issuers that will successfully adapt to change, exceed minimum credit statistics, and exhibit the most promising operating performance potential.
Source: virtus.com NCZ
NCZ has $292m in assets with an expense ratio of 140bps. The forward yield is a very generous 11.7%, which is great for investors more concerned about income generation than total return. NCZ shows an expense ratio is 1.55%, with a net expense ratio of 1.40%, as there is a contractual expense reimbursement in effect through 02/01/2023. Both figures are stated by the manager with the important note that the leverage expense is excluded!
NCZ Holdings Review
As of 3/31/22, when the last holdings were reported, NCV held 262 assets. Unlike like some funds recently reviewed, NCZ provided investors with an almost pure fixed-income allocation, not one mixed with many equities (<5%).
www.virtus.com NCZ
Being all fixed income, ratings and maturity distribution become important.
www.virtus.com NCZ
With "BBB" being the lowest investment-grade rating, about 11% qualify for that designation. Under 2% are rated below "B" where the default risk jumps. While over 55%, the "Not rated" percent is not unusual.
With rates rising, having a high turnover rate (54%) should allow for replacing lower coupon debt with higher yielding debt. The average coupon currently is 3.56%. The above percentages reflect the high leverage ratio NCV employs. NCV has a 4.6-year effective duration and 2.9-year weighted maturity. It is highly unusual for the duration to be longer than the maturity; that I cannot explain.
The assets are spread over the following sectors.
www.virtus.com NCZ
One site listed Utility stocks as the vast majority of the equity exposure; a sector that mimics the movement of debt instruments.
seekingalpha.com NCV Holdings
The fixed income assets are divided amongst Convertibles (52%), Bonds (33%), and Preferred Stocks (15%).
Leverage Funding
As part of NCZ's leverage funding, they use Auction Rate Preferreds. There have been times when the market for Auction Rate Preferred froze, which adds risk. That said, notice the rates were decreasing as new ARPs were taken out.
virtus.com ARP.pdf
The above have a market value near $162m. There is also $109m outstanding in the AllianzGI Convertible & Income Fund II 5.5 % Cum Pfd Registered Shs Series A (NCZ.PA). Recent leverage data was listed as:
CEFConnect.com
NCZ Distribution Review
seekingalpha.com NVZ DVDs
This is not a pattern investors, especially income ones, want to see; a consistent cutting of the payout. Preliminary notices to investors indicate 100% of the recent distributions were from "paid-in capital in excess of par", which I take means ROC. Prior ones showed splits around 35%/65% from NII versus ROC.
NCZ Price and NAV review
They say "a picture is worth a thousand words," but here are a few. The price was $15 at inception; the NAV $14.33, already putting the first investors almost 5% underwater. As you can see, it has only gotten worse! NCZ’s CAGR has been just 4.24% since inception, assuming reinvestment, just 2.18% otherwise. Other fixed income funds have done much better, including its sister fund, NCV.
The current discount is 9.33%. An optimist would look at the above chart and see NCV has traded at a premium often, and that would be correct. Those investors are banking on the NAV deterioration not continuing as much as the price improving.
Portfolio Strategy
While the past might not repeat itself as investors are often told, knowing history should be useful nevertheless.
These are the years where the current inflation rates are matching. Convertible funds were the best of these asset classes. Another major player in Convertibles is Calamos Investments. The next chart shows how their convertible strategy did compared to other fixed-income strategies when rates were increasing.
The next table shows the Virtus CEFs I consider close enough in their strategy to be considered an alternative to investing in NCZ.
Hoya Capital Income Builder
Only one CEF with 5-year data has done worse than NCZ. The two best performers, Virtus AllianzGI Diversified Income & Convertible Fund (ACV) and AllianzGI Equity & Convertible Income Fund (NIE) were definitely aided by holding a decent amount of stocks; both were recently reviewed by me.
The next table include convertible funds from other managers. I also included several floating-rate funds, considering the rate environment we are in. In this group, NCZ places last using the 5-year CAGR numbers.
Hoya Capital Income Builder
Final Thought
When doing one's due diligence before investing in any fund, taking a look at possible alternative choices is important. One place to start is the Seeking Alpha Peers function, which for NCZ lists the following:
seekingalpha.com Peers
There are pages of data comparisons, and you can change the list to your liking, but here are links to their Seeking Alpha home page for the three not listed above:
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This article was written by
I have both a BS and MBA in Finance. I have been individual investor since the early 1980s and have a seven-figure portfolio. I was a data analyst for a pension manager for thirty years until I retired July of 2019. My initial articles related to my experience in prepping for and being in retirement. Now I will comment on our holdings in our various accounts. Most holdings are in CEFs, ETFs, some BDCs and a few REITs. I write Put options for income generation. Contributing author for Hoya Capital Income Builder.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.