Finishing Strong. In 2006, closed end funds (CEFs) were emerging from an environment, in which a glut of new issuance had led to deep discounts and a belief that few opportunities for new issuance would materialize because of this oversupply. Strong performance of the equity and fixed-income markets in 2006, however, provided a positive backdrop for what would become a watershed year for closed-end funds. What started out as a year with tremendous headwinds, ended as a year of remarkable accomplishment.
| Closed-End Fund IPO Market Quarterly Comparison |
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| Source: SEC Edgar Filings, Company Press Releases |
A Strong Headwind. Evolving supply/demand trends were principal drivers of the closed-end fund market in early 2006. In essence, the market started out with too much supply, but demand proved surprisingly resilient. The market struggled at the end of 2005 after a stampede of CEFs focused on covered call writing crowded the market. The over-building in a CEF category first led to cannibalization of existing products before the IPO engine sputtered and shut down. This was the scenario that the CEF market faced in the first quarter of 2006, which was brought home by the fact that the IPO market in funds dropped 91% year-over-year compared with the first quarter of 2005. In previous years, the market had been dominated by fixed-income funds, but in 2006 the market was weighed down with an overabundance of equity-based products.
The Resilient Market. Fortunately, the continued strength of the equity and fixed income markets helped closed-end funds make a comeback. (For a complete rundown of the economy, markets and major asset categories, go to our commentary, 2006 Review and 2007 Outlook.) Even with the general weakness in the financial markets during the second quarter of 2006, CEFs were able to shrug off this temporary setback thanks to the absence of any significant IPO presence, plus investors continued thirst for "yield" in the low-interest-rate environment. While the Fed's tightening activity during the first half of 2006 had an impact on fixed-income distributions, many equity-based funds were able to raise their distributions as the funds total returns continued to outpace their stated distribution rates.
All the Way Back. Near the end of 2006, all the necessary dynamics worked together to generate a resurgence. First, the Fed paused after 17 straight rate increases; second, the equity markets regained their composure and headed toward record territory; third, investor demand for income remained strong; and fourth, secondary CEFs opportunities had, in the mind of the market, dissipated.
Given the supply glut that occurred by the end of 2005, few would have predicted the strength of the resurgence in closed-end funds. The fourth quarter of 2006 bore witness to the largest closed-end IPO as well as the first closed-end fund of funds. In fact, this second offering is being given credit for squelching traditional fourth-quarter tax selling and helping drive prices, in many instances, to all-time highs.
Other CEF Market Milestones in 2006
- Fund advisor mergers found CEFs at the forefront of the debate regarding broker voting.
- Given the abundance of equity-related products, fund sponsors awaited guidance from the SEC regarding managed distribution.
- Investors witnessed the first conversion of a CEF to an exchange-traded fund (ETF).
2006 Calamos Closed-End Funds Recap
All four Calamos closed-end funds made an impressive showing in 2006.
Calamos Convertible Opportunities and Income Fund (CHI)
For a fourth year (out of five), Calamos Convertible Opportunities and Income Fund (CHI) posted a double-digit gain in its market price. For the year ended December 31, 2006, the Fund had a market price return of 14.19% and NAV return of 13.00%, both of which outperformed the CS High Yield Index return of 11.93%. In addition, the Fund has maintained a stable distribution of at least $0.1500 since June 2003. As of December 31, 2006, this equated to a current annualized distribution rate2 of 8.86% based on market price.
Calamos Convertible and High Income Fund (CHY)
The highlight of the year for Calamos Convertible and High Income Fund (CHY) was the Fund's secondary offering in June, which raised approximately $62 million (net). Although the offering did create a short-term weakness in the Fund's share price, the additional shares soon were absorbed, and the Fund posted an all-time high of $17.30 on December 29. For the year 2006, the Fund returned 21.14% (market price) and 13.67% (NAV), outdistancing the CS High Yield Index1 with its return of 11.93%. In addition, the Fund has maintained a stable distribution of at least $0.1219 since August 2003. As of December 31, 2006, this equated to a current annualized distribution rate2 of 8.46% based on market price.
Calamos Strategic Total Return Fund (CSQ)
As mentioned above, equity-based CEFs awoke to the 2006 new year with heartburn from the heavy equity fund issuance of 2005, and Calamos Strategic Total Return Fund (CSQ) began the year at nearly a 7.5% discount. However, as the Fund's already-strong NAV began to rise in 2006, the Fund was able to raise its monthly distribution, and investors eventually realized an increase in the Fund's share price. By the end of the year, the Fund closed its discount gap to 3.2%, and both market price and NAV posted double-digit returns. For the year ended December 31, 2006, the Fund returned 25.45% (market price) and 20.28% (NAV), significantly outperforming the S&P 500 Index with its return of 15.79%. In addition, the Fund delivered a monthly distribution of $0.0975 per share as part of its level distribution policy. This equated to a current annualized distribution rate2 of 7.48% based on the Fund's market price as of December 31, 2006.
Calamos Global Total Return Fund (CGO)
Brought to market late in 2005, Calamos Global Total Return Fund (CGO) had a tremendous year in 2006. Investors' appetite for global investing and the Fund's ability to defensively blend asset classes boosted its appeal. Given the robust performance of the underlying portfolio, the Board of Directors elected to raise the distribution by approximately 17% in June 2006. For the year ended December 31, 2006, the Fund returned 28.10% (market price) and 23.05% (NAV), strongly outpacing the MSCI World Index return of 20.65%. In addition, the Fund delivered a monthly distribution of $0.0875 per share as part of its level distribution policy. As of December 31, 2006, this equated to a current annualized distribution rate2 of 6.18% based on the Fund's market price.
Past Performance
Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. You can purchase or sell common shares daily. Like any other stock, market price will fluctuate with the market. Upon sale, your shares may have a market price that is above or below net asset value and may be worth more or less than your original investment. Shares of closed-end funds frequently trade at a market price that is below their net asset value.
Important Fund Information
The Global Total Return Fund may invest up to 100% of its assets in foreign securities and invests in an array of security types and market-cap sizes, each of which has a unique risk profile. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities. These include fluctuations in currency exchange rates, increased price volatility, and difficulty obtaining information.
Investments by the Fund in lower-rated securities involve substantial risk of loss and present greater risks than investments in higher-rated securities, including less liquidity and increased price sensitivity to changing interest rates and to a deteriorating economic environment.
There are certain risks associated with an investment in a convertible bond such as default risk--that the company issuing a convertible security may be unable to repay principal and interest--and interest rate risk--that the convertible may decrease in value if interest rates increase.
Fixed-income securities are subject to interest rate risk; as interest rates go up, the value of the debt securities in the Fund's portfolio generally will decline.
Shares of closed-end funds frequently trade at a market price that is below their net asset value.
Leverage creates risks which may adversely affect return, including the likelihood of greater volatility of net asset value and market price of common shares; and fluctuations in dividend rates on any preferred shares.
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