GLO: Much Improved Versus A Year Ago, But Some Concerns Persist (NYSE:GLO)

The Clough Global Opportunities Fund (NYSE:GLO) is a closed-end fund that investors can purchase in order to achieve a high level of income without the need to sacrifice the upside potential possessed by common equities. The fund certainly does quite reasonably in this area, as its 11.63% distribution yield is significantly higher than many of its peers. We can see this here:

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As we can see here, the Clough Global Opportunities Fund has a higher yield than any of the other funds shown on this peer comparison chart. In a few cases, the yield difference is quite substantial, such as the difference between this fund and the Calamos or Eaton Vance funds. That could prove to be attractive to an investor whose primary goal is to obtain a very high level of income from the assets in their portfolios. However, in some cases, a high yield is a sign that the market does not have much faith in a fund or that it expects a distribution cut in the very near future. As such, we should pay close attention to the fund’s finances as part of our analysis.

As regular readers can likely remember, we previously discussed the Clough Global Opportunities Fund in April 2023. I will confess that I was very underwhelmed with the fund at the time, as its high expenses and leverage were headwinds to its ability to deliver an adequate performance. We have actually seen this play out since the publication of that article, as the fund’s share price has only appreciated 1.25% over the intervening period:

We can clearly see that this fund has substantially underperformed the S&P 500 Index (SP500) and the MSCI World Index (URTH) since that date. This fund also lagged some of its peers over the same period:

In particular, we can see that the fund underperformed both the Calamos Global Total Return Fund and the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund over the period. It did manage to outperform the other three peer funds, but that is not entirely surprising. While all of these are hybrid funds that invest in both common stocks and bonds, the Guggenheim and PIMCO closed-end funds are a bit more bond-heavy than the Clough Global Opportunities Fund. Globally, common stocks have outperformed bonds over the past year by a significant margin. This is not exactly surprising because stocks are a bit less interest-rate sensitive than bonds, and the prevailing trend in the bond market over most of the period shown in the chart above has been that interest rates are likely to remain at elevated levels for an extended period. Meanwhile, inflation data continues to come in very hot, and to a certain degree common stocks are a hedge against interest rates. Overall, the Clough Global Opportunities Fund does not appear to be faring very well against the two funds (the Calamos and Eaton Vance funds) that have the closest composition to it.

However, as I have pointed out in various previous articles, a simple look at a fund’s share price performance does not provide an entirely accurate picture of how well investors did over a given period. This is because closed-end funds such as the Clough Global Opportunities Fund typically pay out most or all of their investment profits to their shareholders in the form of distributions. The basic business model is to keep the size of the fund’s portfolio relatively stable while giving the investors all the profits. As the distributions will include both dividends and distributions as well as capital gains, these funds tend to have some of the highest yields that can be obtained in the markets. These distributions also provide the investors with a return that is not reflected in the share price. As such, investors in these funds will always do much better than the fund’s share price performance would suggest. Therefore, we should consider the distributions that the fund pays out in any discussion of its performance. When we do that, we see that investors in the Clough Global Opportunities Fund have benefited from a 14.33% total return since the date that my previous article on this fund was published:

While that is certainly a respectable total return over a full-year period, we can still see that this fund has failed to keep up with either the S&P 500 Index or the MSCI World Index. However, the underperformance was much less pronounced than when we looked at the price performance in isolation. This comes from the simple fact that the Clough Global Opportunities Fund has a substantially higher yield than either of the two indices.

The fund’s total return relative to its peers over the period was pretty similar to what we saw looking solely at its price-performance:

As we can see here, the Clough Global Opportunities Fund underperformed both the Calamos Global Total Return Fund and the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund over the roughly one-year period that has passed since the date of the prior article’s publication. This is despite the fact that the Clough Global Opportunities Fund has a substantially higher distribution yield than either of those two funds. An investor whose primary objective is income might be willing to overlook the underperformance in exchange for the higher yield possessed by the fund, but this chart does still show our thesis of high leverage and expenses weighing this fund down relative to its peers.

About The Fund

According to the fund’s webpage, the Clough Global Opportunities Fund has the primary objective of providing its investors with a very high level of total return. This makes a lot of sense given the strategy that the fund employs in pursuit of this strategy. The website explains the strategy quite well:

The Fund’s investment objective is to provide a high level of total return. The Fund seeks to achieve this objective by applying a fundamental research-driven investment process and will invest in equity and equity-related securities as well as fixed-income securities, including both corporate and sovereign debt. The Clough Global Opportunities Fund will invest in both U.S. and non-U.S. markets.

…

The Fund intends to invest primarily in a managed mix of U.S. and non-U.S. equity and debt securities. The Fund is flexibly managed so that, depending on the Fund’s investment adviser’s outlook, it sometimes will be more heavily invested in equity securities or in debt or fixed income securities. The Fund will also, in certain situations, augment its investment positions by purchasing call options, both on specific equity securities, as well as securities representing exposure to equity sectors or indices and fixed income indices. Investments in non-U.S. markets will be made primarily through liquid securities, including depositary receipts (which evidence ownership in underlying equity securities) and exchange traded funds.

This is without a doubt a very broad description that provides the fund to invest in just about anything that it wants, except for futures contracts and currencies. For the most part, though, we can expect that this fund will be invested in either common stocks or in fixed-income securities. Currently, however, the fund is primarily invested in common stock:

As we can see here, 88.89% of the fund’s total assets are invested in common equity securities. This makes a lot of sense when we consider that common equity securities have outperformed bonds by quite a lot over the past year:

The above chart shows the iShares Core U.S. Aggregate Bond ETF (AGG) against the S&P 500 Index and the iShares MSCI ACWI ex U.S. ETF (ACWX). As we can immediately see, bonds are the clear underperformer of the three indices, as they have actually handed a loss to investors over the period. The two common stock indices have delivered a positive performance, with American equities outperforming foreign stocks.

However, the past performance of bonds versus equities is no guarantee that common stocks are the better holding going forward. It is true that over any long-term period, common stocks should outperform bonds. This comes from the simple fact that common stocks are a riskier asset and as a general rule higher risk should correlate to a higher potential reward. It is certainly possible for bonds to outperform stocks over shorter-term horizons, though, such as during an economic shock that results in a flight to safety. There does not appear to be a reason to expect a near-term bond rally today, however.

Yesterday, Federal Reserve Chairman Jerome Powell gave a speech that effectively killed the rate cut narrative that many market participants have been spinning for a while. Regular readers of this column were probably not surprised by this speech, as he said that there has not been sufficient progress made against inflation to justify interest rate cuts in the near future. This is an understatement, as the headline consumer price index has actually increased in every single month this year:

The bond market has generally realized that the expectation of six rate cuts in 2024 that were being projected in late December are highly unlikely to occur. This is the reason why the bond market is down year-to-date, as this asset class has been repricing for fewer interest rate cuts. As of right now, the bond market appears to be priced for either one or two interest rate cuts. Here are the current probabilities for the end-of-year federal funds rate, as projected by the federal funds futures market:

The majority of the market participants are expecting a 475 to 525 basis-point target for the federal funds rate at the end of this year. That would be either one or two 25-basis point cuts from today’s level. Chairman Powell’s speech yesterday, the current inflation data and the probable desire to avoid accusations of political bias heading into the election makes it likely that zero or one cut (in December) is more likely. However, there is at least one Federal Reserve governor publicly admitting that further interest rate hikes could be appropriate. Thus, it is possible that bonds may still be overpriced and that further downside movements could be in the cards.

Common equities, meanwhile, are somewhat less sensitive to interest rate movements. This is partly because the performance of these securities depends highly on expectations of future corporate performance. When these expectations are strong, common stocks can rise alongside interest rates. That was the case over most of the 1990s. In today’s market, inflation expectations could serve as a tailwind because inflation generally causes corporate profits to rise. In addition, one of the biggest determinants of the headline consumer price index recently has been energy prices. Energy stocks naturally do fairly well when energy prices are rising. Commodity producers also frequently do well when inflation is rising. Thus, common stocks are not necessarily affected by interest rates in the same way as bonds and thus could be better holdings than bonds today, depending on what common stocks the fund is actually holding.

A look at the largest positions in this fund reveals that it holds similar stocks to most other equity closed-end funds, although there are a few positions that we do not typically see:

In particular, we see four of the “Magnificent 7” stocks that have been responsible for a significant proportion of the total return of the S&P 500 Index over the past year. These four stocks are Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOG), and Apple (AAPL). Three of these four stocks have beaten the S&P 500 Index and the MSCI World Index by a significant margin over the past twelve months:

The fact that this fund has fairly large positions in these stocks have thus worked out pretty well for it over the past twelve months. Unfortunately, there is a downside to these stocks, as they are all somewhat more sensitive to interest rates than the average common stock in the market. I pointed this out in a few past articles. The reason for this comes from the fact that, given their valuation, investors have to wait for multiple decades in order for the earnings to justify the current valuations. Here are the forward price-to-earnings multiples of these four companies:

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(all figures from Zacks Investment Research)

We can compare this to a company like Exxon Mobil (XOM) that has a forward price-to-earnings multiple of 12.24 and very quickly see that all of these stocks have a substantial amount of growth priced into their share prices. The issue here is that when interest rates rise, bond yields become more attractive and the prospect of potentially having to wait decades for a growth story to play out becomes less appealing. In addition, the fact that these companies do not pay much of a dividend is another strike against them in an environment in which bonds have a reasonable coupon payment. Thus, the fact that this fund has significant holdings in all four of these companies could work against it in the event that the Federal Reserve does not reduce interest rates significantly over the next eight months. With that said, this is a problem that just about every equity closed-end fund is going to have right now, so this is hardly a problem that is unique to the Clough Global Opportunities Fund.

The remainder of the companies that comprise the fund’s largest positions are ones that we do not see nearly as often in a fund. This could be a good thing, though, as one of the biggest problems that fund investors have is concentration risk. In short, fund managers tend to follow the herd, which results in many funds having very similar holdings. As such, investors who hold many different funds may not be as diversified as they think they are because all of their funds are holding the exact same stocks. The fact that this one has some uncommon holdings among its largest positions reduces some of the problems that could arise from a concentrated portfolio. In short, this fund does appear to provide a certain amount of diversification for an investor who may have holdings of many different equity funds.

We can see from the dividend yields of the fund’s largest holdings that it is pursuing a total return objective. Here are the current yields of all of these stocks:

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(SK Hynix does not actually trade on any American exchange. It formerly traded over the counter using the symbol HXSCL but that is now defunct. The yield listed is the dividend yield of the shares that trade in South Korea.)

The forward dividend yield of the S&P 500 Index is 1.39% today:

As we can clearly see, only Ferguson has a yield that is higher than that of the market index, and it is not very much higher. Clearly, the Clough Global Opportunities Fund is not primarily seeking dividend income. It appears that the fund expects that the majority of its investment profits will be in the form of capital gains. As such, the fund’s objective of the provision of total return appears to be appropriate here. After all, total return is the combination of capital gains and dividend income.

There have been numerous changes to the fund’s largest positions since the last time that we discussed it. In fact, the only companies that are currently on the fund’s largest positions list that were also on it roughly a year ago are Airbus, Microsoft, and TransDigm Group. Every other company shown above has been added over the past twelve months. This reinforces the fact that this fund engages in a substantial amount of trading activity. After all, it had a 115.0% annual turnover in the most recent fiscal year. This is quite a bit higher than some of its peers:

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(All information from the respective fund’s most recently filed annual reports)

As we can clearly see, the Clough Global Opportunities Fund has a very high annual turnover relative to three of the other funds on the list. It is not the highest, however, as both the Calamos Global Total Return Fund and the PIMCO Global StocksPLUS & Income Fund have higher turnovers. However, a 115.00% annual turnover is still incredibly high compared to an index fund and that means that this fund is going to have higher trading expenses. Indeed, all of the fund’s expenses are higher than what we would see in an index fund as it reported a total expense ratio of 3.87% in the most recent full-year period. Here is how that compares to the peer group:

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As we can see, the Clough Global Opportunities Fund does have a higher expense ratio than many of its peers, although it is not ludicrously out of line with many of them. The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund does have an expense ratio that is a full 120 basis points lower than this fund, and it delivered a better price performance and total return over the past twelve months, though. While a high expense ratio by itself does not represent a reason to avoid a fund, we did see in the introduction that this fund did not deliver a strong enough performance to both cover its higher expenses and keep up with its peers. That does represent another strike against this fund.

Leverage

As is the case with most closed-end funds, the Clough Global Opportunities Fund employs leverage as a method of boosting the effective total return that it obtains from the assets in its portfolio. I explained how this works in my previous article on this fund:

In short, the fund borrows money and then uses that borrowed money to purchase stocks and bonds. As long as the purchased assets deliver a higher return than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the overall yield and total return of the portfolio. As this fund is capable of borrowing money at institutional rates, which are significantly lower than retail rates, this will usually be the case.

However, the use of debt in this fashion is a double-edged sword. This is because leverage boosts both gains and losses. Due to this problem, we want to ensure that the fund does not have too much leverage because that would expose us to too much risk. I do not usually like to see a fund’s leverage exceed a third as a percentage of its assets for this reason.

As of the time of writing, the Clough Global Opportunities Fund has leveraged assets comprising 25.05% of its portfolio. This represents a substantial decline over the 53.66% leverage that the fund had the last time that we discussed it, which is very nice to see. The fund’s leverage is now much more in line with its peers:

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(all figures from CEF Data)

The Clough Global Opportunities Fund currently has a leverage ratio that sits roughly in the middle of its peer group. This is very nice to see, especially considering that the fund had an incredibly high level of leverage at the time of our previous discussion.

The improvement in leverage was not the result of assets appreciating sufficiently to reduce it. As we can see here, the fund’s net asset value is only up 4.70% since April 5, 2023 (the date of the previous article’s publication):

Rather, it appears that the fund simply reduced its leverage through the sale of some of the assets that it purchased with its leverage. If it timed that sale correctly, this could have allowed the fund to earn some respectable capital gains. At any rate, the reduction of the fund’s leverage has brought it down to a level in which it represents a reasonable balance between the risk and the potential rewards of using leverage. We should not need to worry about the fund’s leverage anymore.

Distribution Analysis

As mentioned earlier in this article, the primary objective of the Clough Global Opportunities Fund is to provide its investors with a very high level of total return. In pursuance of this objective, the fund invests in a combination of common stocks and bonds. At the moment at least, it favors common stocks that deliver the majority of their total investment returns through capital gains. The largest positions in the fund do not have much in the way of dividends, so we should not expect that the fund is earning a substantial amount of income right now. However, capital gains can still provide reasonably attractive total returns in certain market environments. If the fund realizes these gains, then it can pay them out to the shareholders. It does this, as its 115% annual turnover suggests that the fund is realizing capital gains to a significant degree. The fund even borrows money and uses that borrowed money to purchase additional common stock that it realizes capital gains from, boosting the effective return. The fund pools all of this money together and then pays it out to the shareholders, net of its expenses. As capital gains alone can provide respectable returns, we can assume that this business model would allow this fund’s shares to boast a very high yield.

This is indeed the case, as the Clough Global Opportunities Fund currently pays a monthly distribution of $0.0480 per share ($0.576 per share annually), which gives it an 11.63% yield at the current share price. As we saw in the introduction, this is somewhat higher than many other funds that employ a similar investment strategy. However, this fund’s distribution has not been particularly consistent over its lifetime. Indeed, as we can see here, the fund has both raised and lowered its payout numerous times throughout its history:

This distribution history could, admittedly, prove to be something of a turn-off for those investors who are seeking to earn a safe and consistent income from the assets in their portfolios. This consistency is important for retirees and others who are reliant on their assets to provide them with the money that they require to pay their bills and cover lifestyle expenses during a period in which the price of everything that we purchase seems to be rapidly increasing. The fund very slightly cut its distribution earlier this year (by $0.003 per share monthly), which is the last thing that we really want to see in an inflationary environment. Fortunately, the distribution cut was very small.

As I have pointed out numerous times in the past, a fund’s distribution history is not necessarily the most important thing for those investors who are considering purchasing shares of the fund today. After all, new investors will receive the current distribution at the current yield and will not be adversely affected by events that have occurred in the past. The most important thing for new investors is how well the fund can sustain its distribution going forward. Let us investigate this.

Fortunately, we have a fairly recent document that we can consult for the purposes of our analysis. As of the time of writing, the most recent financial report for the Clough Global Opportunities Fund corresponds to the full-year period that ended on October 31, 2023. As such, it will not include any information about the fund’s performance over the past five months. This could be important due to the fact that just about any fund that invests primarily in common equities had the potential to earn a substantial amount of capital gains over the period stretching from November 2023 until the present day. This report will not provide any insight into how well the fund managed to take advantage of this opportunity. It will still provide us with a great deal of insight into the fund’s performance during the challenging market conditions that were present during the summer of 2023, however. A fund’s performance during a difficult market can sometimes provide better information about the quality of its management than its performance during a time when everything is appreciating in price. This report is also newer than the most recent one that was available to us the last time that we discussed this fund, so that is nice to see.

For the full-year period that ended on October 31, 2023, the Clough Global Opportunities Fund received $4,253,181 in dividends and $5,143,364 in interest from the assets in its portfolio. When we combine this with a small amount of income from other sources, we see that the fund had a total investment income of $9,540,002 over the full-year period. This was not sufficient to cover the fund’s expenses during the period, and it ended up reporting a net investment loss of $4,787,989 over the course of the year. This is almost certainly going to be concerning at first glance as the fund obviously did not earn nearly enough income to pay any distribution, yet it still distributed $29,164,469 to its shareholders.

However, there are other methods through which a fund can earn the money that it requires to cover its distributions. For example, it might have been able to earn some money via capital gains through the sale of common stock that goes up in price. Realized capital gains are not considered to be investment income for tax or accounting purposes, but they clearly represent money coming into a fund that can be paid out to the shareholders.

Unfortunately, the fund failed miserably at this task over the period. For the full-year period that ended on October 31, 2023, the Clough Global Opportunities Fund reported net realized losses totaling $42,942,027, but these were partially offset by $32,442,679 net unrealized gains. Overall, the fund’s net assets declined by $47,703,358 after accounting for all inflows and outflows in the period. Thus, this fund clearly failed to fully cover its distributions during its most recent fiscal year. That was the second year in a row that this was a case, which explains the distribution cut.

We should keep an eye on this fund going forward, especially given the risks surrounding interest rates, monetary policy, inflation, and the election right now. There could be some events that push down common stocks, particularly the technology stocks that account for a significant percentage of this fund’s total assets. That could further jeopardize its ability to sustain its distributions going forward.

Valuation

As of April 16, 2024 (the most recent date for which data is available as of the time of writing), the Clough Global Opportunities Fund has a net asset value of $6.02 per share but the shares trade at $5.01 each. This gives the fund’s shares a whopping 16.78% discount on net asset value at the current price. This is relatively in line with the 16.89% discount that the fund’s shares have had on average over the past month. As such, the current price looks like a reasonable level to acquire shares of the fund.

Conclusion

In conclusion, the Clough Global Opportunities Fund offers investors the interesting proposition of being a single fund that invests in both common equities and debt securities from around the world. Unfortunately, the fund has underperformed relative to some of the similar funds that favor equities as opposed to debt. It does look much better than the last time that we discussed it, though, as its leverage has been reduced significantly and so the risks are not nearly as great as they once were. The portfolio also appears decent if we overlook the sizable holdings in the American mega-cap technology companies that constitute the largest positions of just about every fund in the market. The big concern here is that the fund has failed to cover its distributions for two years in a row, and it could have some interest rate risk from the Magnificent 7 stocks.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.