Featuring:
Tony Huang
Portfolio Manager
Advent Capital Management
With additional capital raised in 2024, the Advent Convertible & Income Fund (AVK) balances convertible securities and high yield bonds as it aims to provide capital appreciation and income amid current market conditions. Gain updates on the Fund’s portfolio allocation, performance and potential opportunities from Portfolio Manager Tony Huang.
Advent Capital Management is the Investment Adviser of the Advent Convertible and Income Fund (AVK). The Servicing Agent for the Fund is Guggenheim Funds Distributors. Learn more here.
Transcript
CEFA:
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association. Today we are joined by Tony Huang, Portfolio Manager with Advent Capital Management. Advent manages the Advent Convertible and Income Fund, ticker AVK.
We are happy to have you with us today, Tony.
Tony Huang:
Thanks. It's great to be here.
CEFA:
I mentioned that you manage the Advent Convertible and Income Fund. Can you discuss the investment strategy for the fund and how the components of this convertible and high yield strategy complement each other?
Tony Huang:
Yes. The investment objective for AVK is to provide a total return from the combination of current income and capital appreciation. It focuses its highest asset allocations to convertible securities and high yield bonds. So these are both debt issuances from corporations, so there is significant synergy for our research team and combining the analysis. Often times we're looking at one company with both a convertible bond and a straight debt high yield issuance, and that helps us compare and take advantage of pricing differences to find the best return profile for the fund's investors.
CEFA:
How do you manage the allocation between convertibles and high yield and what would cause a significant shift in the portfolio allocation?
Tony Huang:
We're a bottom-up research firm. From a security selection standpoint, we think there's a lot of value to add in selecting individual securities and issuers where our team has analyzed the financials and looked at the operating environment to gain conviction on owning the securities of the company. As a result, sometimes our allocation is just what the individual selections result in when the portfolio is added up. But these are different markets, convertibles, high yield and equity, and we have portfolio managers and trading teams that monitor them. They know trading dynamics. They look at pricing differences, and that helps us understand which asset class in general is best to allocate to: the ones that have the best risk reward ratios as prices change.
CEFA:
AVK raised additional capital in 2024. How have you put that capital to work in the portfolio?
Tony Huang:
Well, first we want to welcome any new shareholders that participated in the rights offering or the secondary trading that followed, and we appreciate all new and existing shareholders that took advantage of that opportunity. Now about how we put the capital to work, the asset classes haven't changed, but their mix did slightly. When we raised the convertible allocation, this was 43% of assets in July, which was the last quarter before the rights offering happened. This allocation to convertible securities is now 47% as of our last public report in November. The high yield bond allocation, which was 41% in July, fell to 39%. So we've allocated more of the rights offering proceeds to convertibles than we did to high yield, where both are still a meaningful percentage of the Fund’s allocations.
CEFA:
Overall, could you discuss the performance for AVK shareholders during 2024?
Tony Huang:
Yes. During 2024, AVK shareholders enjoyed positive NAV returns as well as reductions in the trading discount to NAV. The NAV grew approximately 8.1% in calendar 2024, and the discount started the year at 10% and ended it at three and a half percent. So the math on that has a total return of a bit more than 16% at the stock level. And so I think the fund has given shareholders a performance that helps meet the investment objective of a total return from current income and capital appreciation. Of course, the returns are done based on the closed-end fund market convention of reinvesting distributions, and any individual shareholder may have different returns based on when they invested or whether they participated in the rights offering.
CEFA:
Tony, the Federal Reserve has lowered expectations for near-term rate cuts. Economic growth has been resilient, but federal deficits are challenging. We also have a new administration in the US that may impact markets. How do you see an allocation to convertible securities benefiting a portfolio in the current market conditions?
Tony Huang:
We are seeing good opportunities in the convertible markets. There's a strong issuance environment in many growth sectors and a level of enhanced economic growth in the United States, some of which comes from just a robust economy, but some from greater business confidence and deregulation in the wake of the election outcome. So we see that the current environment is relatively friendly for potential returns in the convertible markets.
CEFA:
What is your view of high-yield fixed income on the current market?
Tony Huang:
In the high-yield market, we see the same factors. The benefit of convertibles is helping in terms of broad credit worthiness for issuers. That's all key to high-yield performance. But the spreads to risk-free rates are fairly thin compared to history. This leads us to think there is a different upside profile in the current environment compared to convertibles.
CEFA:
Are you finding valuations for convertibles and high yield to be at attractive levels?
Tony Huang:
Well, the opportunities for convertibles are pretty high right now. In the last 15 years, the issuance was highest during the pandemic in 2020 and 2021. But 2024 has ended as the third-highest year outside of those two, and with five-year issuances being the most common in the convertible market, there are a lot of five-year bonds that were issued in 2020 and 2021 that are coming up for maturity and refinancing, and this may lead to more issuance in 2025 and 2026.
Now, both asset classes, convertibles and high yield, they benefit from rising equity valuations. This gives more incentives for corporations to issue. And the reasons to issue securities in general may be broadening if the merger and acquisition environment becomes more friendly with an easy regulatory environment out of Washington. So we think that some of the reasons for the higher valuations in the equity markets and thin spreads in the high yield markets are justified, and we think that good performance on corporate earnings is something that can help both the asset classes in the coming year.
CEFA:
Where are you seeing the best opportunities within the framework of the AVK strategy?
Tony Huang:
So convertible markets, they benefit from the robust issuance environment. There is a rise in volatility of equities in the wake of the new administration and the strong corporate earnings growth situation that markets find themselves in entering 2025. Another opportunity set for AVK would be international investments. This is a meaningful allocation in just over 20% of assets, and we think valuations in the bounce back capacity of the economies in Europe and China, they present good potential for gains in the coming year. I think our high yield selection method of our research team, which involves finding well priced individual issuances, is a good strategy in an environment where the big broad gains in the market spreads of the current high yield investing environment are a little bit less likely than in past years.
CEFA:
What risks are you focusing on in the current market environment?
Tony Huang:
Corporate profits are the key here. They've been expanding to higher levels of growth in the last few quarters as the recession risk has faded. What is very important is for corporations to use the levers they have to keep that growth robust, whether it's raising their profit margins or using mergers and acquisitions to get greater scale and enhance product portfolios. The other thing I'll mention is volatility of the equity markets.
We as convertible investors, like volatility. It enhances the valuation of the convertibles. It highlights the value of having the choice between principal value at maturity and equity conversion value. But it takes good research to manage that volatility, which we do have here at Advent. And whether it comes from whether the source is corporate performance or geopolitical environment, managing that volatility is very important. Research staff is keenly aware in selecting individual securities that have a lot of risks that might not be priced in.
CEFA:
How is AVK currently positioned?
Tony Huang:
Well, we continue to have a very strong allocation towards convertibles and high yield. But I'll mention that with the rise in the equity markets over the past few quarters, we've been prudent with the leverage of the fund. That actually has fallen a bit as we invested the rights offering proceeds, and we think that's been a prudent move to help manage the risks of the fund.
CEFA:
Tony, how do you see an allocation to a strategy like AVK best positioned in an investor's diversified portfolio, and likewise for an investor that is more income oriented?
Tony Huang:
AVK has a meaningful distribution. I think closed end fund investors find that attractive. We aim to provide that through the total return investment objective, whether it comes from current income or capital appreciation. I think in a fixed income allocation, convertibles and AVK make sense as a way to combat inflation and rising interest rate risks that might hurt other parts of a fixed income portfolio, but they also make sense in an equity allocation as a way to introduce downside protection from the valuations in the equity markets.
CEFA:
Tony, thank you so much for taking the time to join us today.
Tony Huang:
Thanks for hosting AVK. It's really great to discuss the fund with investors.
CEFA:
And we want to thank you for tuning in to another CEF Insights podcast. For more educational content, please visit our website at www.cefa.com.
Podcast recorded January 2025.
Disclosure
This material is not, and is not intended as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Advent Capital Management disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Advent does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service, nor shall any security, product, investment advice or service be offered or sold in any jurisdiction in which Advent is not licensed to conduct business and/or an offer, solicitation, purchase or sale would be unavailable or unlawful.