GLQ: High-Yielding CEF Benefitting From Russia’s Invasion Of Ukraine

~ by Snehasish Chaudhuri, MBA (Finance).

Clough Global Equity Fund (NYSE:GLQ) is a closed-end balanced mutual fund (“CEF”) that primarily invests in equity markets around the globe. It also invests in equity swaps and call options, corporate and sovereign debt, in both U.S. and non‐U.S. markets. GLQ’s investment objective is to provide a high level of total return, primarily through high current income. The fund was formed in 2005 and has been paying consistent monthly dividends for the past nine years. It generates strong yield on a consistent basis, mostly in the double digits. Based on such a high yield, it was able to record an annual average total return of 16.1 percent during 2017 and 2021. GLQ is also trading at a discount of 11 percent to its net asset value (“NAV”).

Clough Global Equity Fund has a Robust Portfolio that Delivers Returns

Clough Global Equity Fund is managed by Clough Capital Partners, L.P. The fund follows a theme-based investment process which involves focusing on such events as industry consolidation, technological change, scarcity of raw material, and changes in sovereign policies. It benchmarks its performance against the S&P 500 Index (SP500), which also is considered the benchmark for the broader market. 12.3 percent of GLQs entire portfolio is invested in sovereign bonds, which are traded AAA but have a very low average coupon size of 1.84 percent. The fund has a total assets of $279 million and makes effective use of leverage. At present, the leverage ratio is 32.4 percent.

Almost 79 percent of the entire portfolio is invested in equity markets, including both long and short positions. And again the largest chunk of investments within the equity portfolio is allocated to stocks from four sectors – information & communication technology (ICT), financial, industrial, and healthcare. These four sectors account for 70 percent of net total equity investments (90 percent of long position, and 20 percent of short position). I found that this fund has made significant exposures in a single stock only in 15 companies – primarily from these four sectors. In my opinion, this is a wise move, as I strongly believe that these are the four sectors that will witness the maximum growth in the coming decade. These 15 stocks account for almost 60 percent of GLQ’s equity exposure – both long and short.

Major drawback of this fund is its high expense ratio of 3.34 percent. However, it has been generally observed that funds which own international investments tend to witness higher fund management expenses than funds that own stakes only in large U.S. companies, because investing in international markets requires extensive research and expertise. Moreover, the levered component of GLQ’s portfolio also makes an impact. Thus, in my opinion, a high expense ratio should not deter investors from investing in Clough Global Equity Fund, as they are able to achieve high enough returns.

Major Exposures in GLQ’s Equity Portfolio Performed Well Over the Long Run

The largest exposure in ICT sectors is mostly software behemoths such as Microsoft Corp. (MSFT), Alphabet Inc. Class C (GOOG), Apple Inc. (AAPL), Palo Alto Networks, Inc. (PANW); and a semiconductor manufacturer – Texas Instruments Incorporated (TXN). In addition, the fund also has a long position of almost 8 percent in technology-dependent consumer industries – Tesla, Inc. (TSLA) and Amazon.com, Inc. (AMZN). We all know how poorly the technology stocks performed in 2022. However, over the past 5 years, they recorded high price growth. Major exposures in the financial sector include two Indian banks – HDFC Bank Ltd. (HDB) and ICICI Bank Ltd. (IBN) – while CRISPR Therapeutics AG (CRSP) is the only significant investment in the healthcare sector.

A significant proportion of GLQ’s equity portfolio is invested in stocks of aerospace and defense companies like Northrop Grumman Corp. (NOC), Raytheon Technologies Corp. (RTX), Airbus SE (OTCPK:EADSF), The Boeing Company (BA), and TransDigm Group Inc. (TDG). Equities of defense manufacturers are set to do well in lieu of Russia’s invasion of Ukraine. Increased military expenditures throughout the globe give major impetus to these companies. Stock market performance over the past six months validates this further. While all other long positions generated price loss between 7.5 percent to 47.5 percent, all the five aerospace and defense listed above generated a positive price growth. BA grew by 47 percent, while TDG and EADSF grew around 25 percent. Although, IBN, HDB, and TXN generated price growth between 12 and 14 percent, during the same period, these were short positions.

Clough Global Equity Fund is in a Position to Sustain a Strong Yield and Return

Significant proportion of GLQ’s assets is invested in ICT, financial, industrial, and healthcare sectors. These sectors in my view have maximum growth potential in the coming decade. Although the technology stocks performed poorly in 2022, they recorded high price growth over the past five years. In addition, GLQ’s various investments in aerospace and defense companies generated strong positive price growth during 2022, at a time when the broader market performed poorly. These stocks most likely gained due to Russia’s invasion of Ukraine, and increased military expenditures throughout the globe provide further impetus for growth. In my opinion, this also enables GLQ to sustain its current level of yield, which is quite impressive at present. Moreover, Clough Global Equity Fund pays monthly distribution and also generates a high average annual return over the long run.

The fund has a decent asset base and invests mostly in the U.S. market and U.S. multinational companies. The fund also makes effective use of leverage, and the leverage part is not out of proportion. Most importantly, the short positions are primarily in those four above-mentioned sectors. So, an efficient fund manager can make significant gains by efficient utilization of its short positions. That way, there is less risk involved with its equity investments. The fixed income securities are also AAA rated, currently trading at $6.45 which again is a discount of 11 percent to its NAV. This makes GLQ even more attractive.

The only major drawback to Clough Global Equity Fund, in my view, is its high expense ratio. However, that should not deter investors from investing in this high-yielding CEF, as the yield and return are calculated after considering this expense.

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