GLQ: Improved Leverage Profile and Distribution Ratio (NYSE:GLQ)

thesis

Clough Global Equity Fund (NYSE:GLQ) is a closed-end equity fund that we haven’t visited since 2022. In our last article on the name, we pointed out how the fund had a very high unsustainable distribution ratio and a a significant amount of leverage, making it a high beta game.

With the stock market rising in 2024, we’ll review this name, its structure and composition, and highlight where CEF fits in an investor’s portfolio.

A fund with a lot of leverage

When we last looked at this name, CEF was highly leveraged at 40%, making the fund a very volatile proposition. The GLQ in 2024 looks very different, the name has significantly reduced its gear ratio:

The fund is barely leveraged at 12% now, making it a much less volatile CEF and in process a fund more suitable for the current environment, which is full of macro uncertainties.

CEF also shed its bond holdings, essentially becoming an equity-only closed-end fund:

The foreign equity sleeve is 63%, while the US equity sleeve is 34%. The corporate debt sector makes up a negligible 0.02% of the fund and we expect this figure to drop to zero as the remaining bonds mature. Short-term investments and cash are used to manage the fund’s liquidity, so expect these allocations to persist.

Defeating the spy in 2024

GLQ was able to select outstanding individual names for its portfolio, outperforming both the S&P 500 and Nasdaq in 2024:

While the fund’s low leverage helped, most of the name’s outperformance comes from its security selection, which is very tech-heavy and contains a significant amount of semiconductor stocks:

Information Technology makes up 41% of the fund, followed by Consumer Discretionary at 22% and Health Care at 20%. Its 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 ​​emblematic of CEF’s outperformance, the name being a South Korean semiconductor supplier. This fund has a mandate to invest globally and has been able to take advantage of global technology trends.

Doing a longer-term total return analysis isn’t helpful at this stage because the name has significantly narrowed its focus and narrowed its focus. The best way to think of this name going forward is as a global equity CEF with a low leverage ratio and a technology focus. We like this new format much better than the old one because the bottom line is a more honest and simple approach to tech stocks. Highly leveraged CEFs tend to take a significant hit in a down market, causing managers to deleverage and impact NPV permanently. While interesting in bull markets, highly leveraged constructs tend to eventually cause NAV declines. Notably, GLQ is down -42% in 2022.

Premium/Discount at NAV

CEF is now seeing a slow reduction to NAV as it has normalized its structure:

After the significant loss in 2022, CEF saw its 3% premium move to a steep discount of -20%. This type of move is not uncommon for high-beta names, with significant losses also extending the discount to NAV.

CEF rebounded slightly, with the discount now at -14%, for a narrowing of 6 points.

Distributions – Using synthetic ROC

GLQ is an interesting CEF example because its Section 19a notice seems confusing:

While we have seen the fund perform outstandingly in 2024, its Section 19 filing shows high ROC utilization. How is that possible? ROC is typically used by fund managers when they cannot crystallize capital gains in shares and are thus forced to cover distributions with their own capital.

GLQ is a very rare breed where the fund choose to use ROC to adopt a more aggressive stance without using more leverage. The fund has NPV performance to support its distribution, but has chosen to use its distribution cash/liquidity to increase its equity allocation. Instead of selling some of his holdings, the manager is betting that a smaller cash balance will be needed and will therefore use some of it for his distribution.

A high ROC figure here is therefore very different from the same for a poorly performing fund. The manager has chosen to optimize its cash and liquidity allocation, rather than using ROC to fund an unsustainable distribution. The distribution rate is currently 10%; therefore the NAV performance shows us that there is plenty of underlying dynamic total return to back this up. We expect the figure to switch to 100% capital gains once full liquidity calibration takes place.

GLQ risk factors and before

The fund’s main risk factor is comprised of the performance of technology and semiconductor stocks. A decline in those sectors would see a significant move lower in the fund’s price, which would be slightly accelerated by CEF’s leverage ratio. While the fund has significantly reduced leverage, there is still a gearing ratio, meaning that CEF benefits from it in up markets, but also experiences faster down moves in down markets.

We believe GLQ has made a smart move in reducing leverage and adopting a distribution ratio more in line with historical total returns for the stock. Over the long term, the fund should outperform if the portfolio management team continues to pick the right names, making the fund an attractive, actively managed technology-leaning portfolio.

Conclusion

GLQ is an equity fund. Over the past two years, CEF has transformed into a low-leverage, equity-only instrument. The name still trades at a steep -14% discount to NAV due to its significant loss of -42% in 2022. CEF is overweight global technology and semiconductor names, which account for 41% of holdings. We like the fund’s transformation from a high-beta vehicle to its current format and believe a lower leverage ratio will help the name over the long term. CEF has had an outstanding 2024 with a total return of 23% and, given the stretched equity markets, falls into the holding category today.