Convertible Bond CEF Double Digit Gains And Over 10% Yields
Jane Miller ; 2025-10-24 15:13:27
Key Points
- Convertible bonds and convertible stocks are a tool that public companies often use for large financings to avoid disturbing their equity cap tables.
- Warren Buffett’s Berkshire Hathaway has been a big convertible securities owner, while Coinbase is the most recent company of note to use the platform for a $2 billion financing.
- With the help of savvy management, CEFs that focus on convertible securities for their portfolios, can deliver steady, index equivalent gains along with high dividend yields.
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Convertible securities are hybrid bonds and stocks that have a prearranged conversion factor into common stock, but pay an interest coupon to the holder until conversion is exercised. They have been in existence since the mid-1800s, when investors demanded the stability of bonds in order to take the risk on future equity stakes in a new transportation invention called therailroad. Nowadays, companies often turn to convertible securities for large capital raises so their equity capitalization tables can avoid dilution. This way, they can choose a future conversion time long after the raised funds have been spent to enhance value and appreciate the stock’s market price to better absorb new shares in the float.
Convertible Securities Deals Of Note
As one of the most famous investors in history, Warren Buffett is certainly no stranger to convertible securities. In the aftermath of the 2008 subprime banking meltdown fiasco, Bank of America required $5 billion in addition to TARP money in order to stabilize its operations. Buffett came to the rescue in 2011 on the following terms:
- The investment was structured as convertible preferred stock with a 6% dividend and warrants to buy Bank of America common stock at approximately $7.14 per share.
- Buffett exercised the warrants to purchase common stock in 2017.
- At the time of conversion, the value of the common shares was much higher than the $7.14 exercise price, turning the investment into a large profit.
- Berkshire thus acquired a substantial stake in BoA common stock.
More recently, Coinbase announced in August that it was raising $2 billion via $1 billion in convertible notes with a 2029 maturity and $1billion convertible notes maturing in 2032. Conversion to be in common stock, cash, or a combination of both.
Convertible securities can be a lucrative tool for a closed-end fund (CEF) when a portfolio manager is sophisticated enough to use their coupon dividends strategically before capitalizing on conversion gains. Those that can do this consistently can generate gains on par with major stock indexes while at the same time delivering high dividend yields. If they can be obtained at a discount to Net Asset Value, that is an added plus.
Advent Convertible and Income Fund
Simon Guggenheim was a scion of the powerful and wealthy Guggenheim family, best known for their Frank Lloyd Wright designed namesake museum on New York’s Upper East Side.
Advent Convertible and Income Fund (NYSE: AVK)
Yield: 11.02%
Price/NAV: $12.80/$13.41
Discount: -4.55%
With $357 billion AUM, New York headquartered Guggenheim Investments has established a niche reputation for its fixed-income portfolio management prowess, with props fromBarron’sandInsurance Asset Risk.It was founded by the wealthy Guggenheim family, best known for its landmark spiral designed Upper East Side art museum designed by architect Frank Lloyd Wright. It presently owns the Advent Convertible and Income Fund. Guggenheim’sAdvent Convertible and Income Fund (NYSE: AVK)is its foray into convertible securities, and it has been a solid success.
Advent Convertible and Income Fund currently allocates about 47.27% of its $931.4 million portfolio towards convertible bonds with the remainder in high-yield nonconvertible “junk” bonds (39.98%), equities (8.49%), cash (2.73%), and CLOs (1.53%). Its top 5 largest holdings (all convertibles) are:
- Advent Convertible Bond ETF:2.88%
- Boeing: 1.16%
- Uber Technologies:1.05%
- Norwegian Cruise Line:0.94%
- Coinbase Global:0.90%
With an 11.02% annual dividend yield payable monthly, AVK’s trailing returns have been consistently in double digits:
- 1-Year:21.41%
- 3-Year:19.52%
- 5-Year:11.02%
- 10-Year:10.72&
Virtus Convertible & Income Fund II
The Virtus Convertible & Income Fund II is managed and issued by German insurance titan Allianz.
Virtus Convertible & Income Fund II(NYSE: NCZ)
Yield: 10.45%
Price/NAV: $13.81/$15.46
Discount: -10.67%
Founded by Allianz and jointly managed by the Allianz Global Investors Fund Management LLC and Allianz Global Investor U.S. LLC, theVirtus Convertible & Income Fund II(NYSE: NCZ)is a closed-end fund primarily managing a portfolio of convertible bonds and high-yield bonds that are below investment grade (i.e., “junk bonds”). As a risk mitigation policy, Virtus Convertible & Income Fund II keeps the average maturities of its holdings between 5 to 10 years.
NCZ allocates about 61.82% of its $294.27 million portfolio towards convertible bonds with the remainder in high-yield nonconvertible “junk” bonds (35.18%), other (2.41%), and cash (0.60%). Its top 5 largest holdings are:
- Boeing Company 6% Pfd Registered shs Series A: 3.43%
- Wells Fargo & Company 7.5 % Non Cum Perp Conv Pfd Registered Shs A Series L: 2.73%
- Welltower Op Llc 3.125% 15-jul-2029: 2.63%
- Live Nation Entertainment, Inc. 2.875% 15-jan-2030: 2.56%
- Lumentum Holdings Inc. 0.5% 15-dec-2026: 2.22%
NCZ’a 10.45% yield pays distributions monthly. Its trailing returns are:
- 1-Year: 25.73%
- 3-Year: 21.11%
- 5-Year: 8.13%
- 10-Year: 8.09%
Calamos Dynamic Convertible and Income Fund
A variety of convertible bonds from Boeing Boeing (DECS, ACES & PRIDES) are the largest holding in the Calamos Dynamic Convertible and Income Fund .
Calamos Dynamic Convertible and Income Fund (NASDAQ: CCD)
Yield: 11.13%
Price/NAV: $21.47/$21.45
Discount: -0.001%
TheCalamos Dynamic Convertible and Income Fund (NASDAQ: CCD)is a closed-end mutual fund based in Naperville, IL that invests in publicly traded convertible securities, as well as corporate bonds, equity linked notes, and floating rate bonds. The fund also uses option trading strategies to boost returns.
The fund’s portfolio was $827.2 million AUM as of the start of October. Its portfolio held 86.12% convertibles, 9.75% corporate bonds, 2.02% in cash, and 1.80% in bank loans, with equities at 0.08%. Its 5 largest positions (all convertibles) are:
- Boeing DECS, ACES & PRIDES (these are different types of convertible bonds): 3.0%
- Uber Technologies: 2.1%
- Microstrategy, Inc.: 1.9%
- PPL Capital Funding, Inc.: 1.8%
- Live Nation Entertainment, Inc.: 1.8%
CCD’s 11.13% annual dividend yield pays distributions monthly. Its trailing returns are:
- 1-Year: -5.58%
- 3-Year: 14.53%
- 5-Year: 8.86%
- 10-Year: 12.49%
While convertible securities are off the beaten track as far as most conventional fund portfolio assets, their inclusion affords a fund and its shareholders exposure to the kinds of deals usually only made available to institutional investors. This kind of access is often very lucrative at the end of the day, so even on a reduced scale, it is definitely a welcome addition to a portfolio.