Clough Global Equity Fund (New York Stock Exchange: GLQ) is a closed-end equity fund that we have not visited since 2022. In our last article on the name, we highlighted how the fund had a very high unsupported distribution rate and a significant amount of leverage, making it a high beta bet.
In light of the stock market rally in 2024, we will review this name, its structure and composition, and highlight where the CEF fits within an investor's portfolio.
A highly unleveraged fund
When we last looked at this name, the CEF had a high leverage ratio of 40%, making the fund a very volatile proposition. GLQ in 2024 looks very different, as the name has significantly reduced its leverage ratio:
leverage (Fund website)
The fund is currently leveraged at just 12%, making it a much less volatile CEF and The process creates a fund more suitable for the current environment, full of macroeconomic uncertainties.
The CEF has also eliminated its bond holdings, essentially becoming an all-stock closed-end fund:
Assignment (Fund Fact Sheet)
Foreign equity accounts for 63%, while U.S. equity accounts for 34%. Corporate debt accounts for a paltry 0.02% of the fund, and we expect this figure to fall to zero as the remaining bonds mature. Short-term investments and cash are used to manage the fund's liquidity, so those allocations are expected to persist.
How to beat SPY in 2024
GLQ has managed to select standout individual names for its portfolio, outperforming both the S&P 500 and the Nasdaq in 2024:
While the fund's low leverage has helped, most of the name's outperformance comes from its stock selection, which is tech-heavy and contains a significant amount of semiconductor stocks:
Sectors (Fund Fact Sheet)
Information technology accounts for 41% of the fund, followed by consumer discretionary at 22% and healthcare at 20%. Top names include Apple (AAPL) at 8% of the fund, Microsoft (MSFT) at 7.5% and SK hynix (OTCPK:HXSCF) at 6.7%. SK Hynix is a symbol of the CEF’s outperformance, as its name is a South Korean semiconductor vendor. This fund has a mandate to invest globally and has been able to take advantage of global technology trends.
At this stage, a longer-term total return analysis is not useful as the name has significantly deleveraged and narrowed its focus. The best way to think of this name going forward is as a global equity CEF with a small leverage ratio and a technology focus. We like this new format much more than the previous one as the fund is a more honest and straightforward view of technology equities. Highly leveraged CEFs tend to take a hit in a down market, leading managers to reduce leverage and permanently dent NAVs. While attractive in bull markets, highly leveraged models tend to ultimately lead to NAV declines. Notably, GLQ fell -42% in 2022.
Premium/Discount on NAV
The CEF is now seeing its discount to NAV slowly narrow as it has normalized its structure:
Following its significant loss in 2022, the CEF saw its 3% premium shrink to a significant -20%. This type of move is not unusual for high beta stocks, as significant losses also lead to a widening of the discount to net asset value.
The CEF has rebounded slightly and the discount now stands at -14%, which represents a reduction of 6 points.
Distributions – Using synthetic ROC
GLQ is an interesting example of CEF because its Section 19a notice seems puzzling:
Republic of China (Article 19a)
While we saw the fund perform outstandingly in 2024, its Section 19 notice shows a high utilization of ROC. How is this possible? Fund managers typically use ROC when they are unable to crystallize capital gains in stocks and are therefore forced to cover distributions from their own capital.
GLQ is a very rare species where the bottom choose Using ROC to take a more aggressive stance without using more leverage. The fund has a net asset value yield that allows it to sustain its distribution, but has chosen to use its cash/liquidity for distribution in order to increase its equity allocation. Rather than selling a portion of its holdings, the manager is betting that less of the cash balance will be needed and will therefore use some of that balance for distribution.
Therefore, a high ROC figure in this case is very different from the same for a poorly performing fund. The manager has favorite to optimize its cash and liquidity allocation, rather than using the ROC to fund an unsupported distribution. The distribution rate is currently 10%, so the NAV yield shows us that there is plenty of underlying dynamic total return to support it. We expect that figure to change to 100% capital gains once the full liquidity calibration is done.
GLQ and future risk factors
The fund's main risk factor is comprised of the performance of technology and semiconductor stocks. A decline in the respective sectors would lead to a significant decline in the fund's price, which would be slightly accelerated by the CEF's leverage ratio. While the fund has significantly reduced leverage, a leverage ratio still exists, meaning that the CEF benefits from it in rising markets, but also experiences faster declines in falling markets.
We believe GLQ has made a smart decision by reducing its leverage and adopting a distribution rate more in line with historical total equity returns. Over the long term, the fund should outperform if the portfolio management team continues to select the right names, making for an attractive portfolio with an actively managed technology bias.
Conclusion
GLQ is a closed-end equity fund. The CEF has transformed into a low-leverage equity vehicle over the past two years. The name still trades at a large discount of -14% to NAV due to its significant loss of -42% in 2022. The CEF is overweight global technology names and semiconductors, which represent 41% of the holdings. We like the fund's transformation from a high beta vehicle to the current format, and believe a lower leverage ratio will help the name in the long run. The CEF has had an exceptional 2024 with a total return of 23%, and given the tension in equity markets, it is currently in the hold category.
