Letter from Chuck Clough

Transcription

1 Allocation Fund - GLV Equity Fund - GLQ Opportunities Fund - GLO Letter from Chuck Clough To Our Investors: Clough Global Allocation Fund (GLV) During the three months ended July 31, 2015, the Clough Global Allocation Fund s total return, assuming reinvestment of all distributions, was 3.80% based on the net asset value and 1.18% based on the market price of the Fund. The S&P 500 and the MSCI World Index returned 1.41% and -0.07% respectively over the same period. During the three months ended July 31, 2015, the Fund paid $0.36 per share in distributions. As of July 31st, the Fund had a dividend distribution rate on the market price of 9.68%. Clough Global Equity Fund (GLQ) During the three months ended July 31, 2015, the Clough Global Equity Fund s total return, assuming reinvestment of all distributions, was 4.55% based on the net asset value and 1.50% based on the market price of the Fund. The S&P 500 and the MSCI World Index returned 1.41% and -0.07% respectively over the same period. During the three months ended July 31, 2015, the Fund paid $0.35 per share in distributions. As of July 31st, the Fund had a dividend distribution rate on the market price of 9.25%. Clough Global Opportunities Fund (GLO) During the three months ended July 31, 2015, the Clough Global Opportunities Fund s total return, assuming reinvestment of all distributions, was 3.91% based on the net asset value and 1.13% based on the market price of the Fund. The S&P 500 and the MSCI World Index returned 1.41% and -0.07% respectively over the same period. During the three months ended July 31, 2015, the Fund paid $0.30 per share in distributions. As of July 31st, the Fund had a dividend distribution rate on the market price of 9.75%. All three legs of the portfolio (longs, shorts and hedges) produced positive results in the fiscal third quarter (May 1, 2105-July 31, 2015). Long positions in the three funds gained between 220 and 331 basis points while short positions gained between 191 and 196 basis points. The Fund s hedge portfolio produced an additional 6 basis points. On the long side, the Financials and Consumer Discretionary sectors were significant contributors in the third quarter. Citigroup and Bank of America continue to sell at discounts to book despite strong profitability, growing loan books and rapidly rising excess capital. As excess capital grows, we believe that regulatory constraints are likely to ease. The funds continue to hold homebuilders, mortgage insurers, and retailers that will benefit from an emerging housing cycle. In healthcare, the funds reduced exposure to most hospital companies when the stocks rose to record valuations in the wake of the Supreme Court decision to uphold the Affordable Care Act. We believe that opportunity in healthcare is now moving to the providers of high technology capital equipment. Improved cash flows among providers will likely be spent to upgrade technology in radiation oncology, imaging and information technology and our new investments are being refocused into those sectors. On the short side, the world economy remains a deflationary place and that is negative for commodity producers, their suppliers, and most emerging markets. An important part of our short and hedge books currently reflect that. The Fund holds a long position in 30 year US Treasury bonds and short positions in various exchange-traded funds (ETFs) in the oil sector and emerging markets. The funds are also restarting long positions in high income producing REIT s and utilities that should be attractive as interest rates once again move lower. In addition to reducing China exposure, we increased a short position in a Korean ETF. We think Korea s economy is particularly vulnerable to a weakening in China s economy and a peaking of the smart phone cycle. We also added to our hedged portfolio by adding to long standing short positions in Brazilian and Russian ETFs. Market dispersion provides opportunities on both the long and short sides The Fund s short positions provided profits in an up market in the third quarter. Promising short opportunities come from seeking out where we believe overinvestment has occurred and excess capacity is building up. This is where supply is about to exceed demand and returns on investment have turned down. Suppliers often continue to overproduce well past cycle tops, particularly if they are leveraged and need to generate cash and that only worsens prices and profitability. Early examples of this include the iron ore cycle and the equipment manufacturers who supplied mining companies. Today, we see two new opportunities in the global smart phone and airline industries. Over the past decade, smart phone handset manufacturers not only built competing capacity additions to manufacture the phones, but they spawned an even greater boom in capacity additions among the component suppliers. The industry spans three continents and accounts for more than $1.3 trillion in equity market capitalization (by our calculations). Now the handset producers are beginning to suffer margin erosion. Microsoft recently wrote off most of the Nokia acquisition it made just last year, and former handset leader, HTC Corp. of Taiwan, announced a cutback in smart phone production. Lenovo bought Motorola s handset unit to diversify its PC business, only to take a $900 million inventory write off. Yet it still plans to introduce two additional models. Three Chinese handset producers reported major second quarter losses.

2 We believe that some of the most vulnerable companies are those that built the massive supply chain to support handset builders. The supply chain is designed to service 20% annual growth, a rate which is unlikely to occur now that the handset industry is shifting down to fewer suppliers and the battle for market share heats up. Many of the components are little more than commodities, and we suspect phone original equipment manufacturers (OEMs) will increasingly force price discounts steeper than costs can be reduced. We have already identified several short candidates in this area, many of them domiciled in Asia. Another industry we are monitoring for growing excess capacity and downward pricing in the face of unrelenting capacity growth is the global airline industry, particularly as these factors impact airlines based outside the U.S. At the moment, the Fund has a modest single digit long exposure to Chinese equities, but we still view events in China as building a strong bullish long-term investment case for Chinese assets. Last week s announcement that the yuan would gradually trade freely is consistent with our view that the yuan will be fully convertible in The announcement destabilized financial markets, but the decision makes sense. For one, China needs the yuan to be part of the IMF Special Drawing Rights (SDR) basket. The yuan has risen substantially in value relative to the euro and yen in recent years and its real market price could in time be above current levels. After all, China sits on $3.7 trillion of foreign exchange reserves and runs a $75 billion current account surplus each quarter. It benefits from commodities deflation and is moving up the quality chain. Once in the SDR basket, we believe it will be the currency in which most cross border Asian trade will be settled. If local governments begin to issue bonds in international markets rather than using bank borrowings, international investors will be drawn in for two reasons. First, they will offer high rates relative to other sovereigns and second, they will be backstopped by a government with trade and current account surpluses. These are contrarian views at the moment, but we are comforted by that. Our China portfolio is focused on a few larger capitalization companies that fit within the dominant company brands theme we have described previously. If you have any questions about your investment, please call Sincerely, Charles I. Clough, Jr. Robert M. Zdunczyk

3 Fund Performance as of 6/30/2015 GLV - Global Allocation Fund Inception date 7/28/ Month 6 Month 1 Year 5 Year Since inception NAV * -1.23% 3.11% 2.79% 11.47% 7.91% MKT 0.30% 4.67% 4.07% 10.86% 6.15% S&P 500 Index Fund 0.28% 1.23% 7.42% 17.34% 8.20% MSCI World Index 0.52% 2.97% 1.23% 12.52% 7.85% GLQ - Global Equity Fund Inception date 4/27/ Month 6 Month 1 Year 5 Year Since inception NAV * -0.05% 3.95% 2.58% 12.11% 7.64% MKT 0.75% 7.02% 4.50% 13.31% 6.03% S&P 500 Index Fund 0.28% 1.23% 7.42% 17.34% 8.11% MSCI World Index 0.52% 2.97% 1.23% 12.52% 7.15% GLO - Global Opportunities Fund Inception date 4/25/ Month 6 Month 1 Year 5 Year Since inception NAV * -1.24% 2.94% 2.18% 11.15% 5.45% MKT -0.93% -1.37% 1.84% 10.88% 3.26% S&P 500 Index Fund 0.28% 1.23% 7.42% 17.34% 7.41% MSCI World Index 0.52% 2.97% 1.23% 12.52% 5.26% * Performance returns are net of fees and expenses. Top 10 Equity Holdings^ as of 6/30/2015 GLV 1. Citigroup, Inc. 5.00% 2. Bank of America Corp 4.79% 3. Lam Research Corp 3.71% 4. Lennar Corp. - Class A 3.30% 5. Liberty Ventures - Series A 3.04% 6. Kansas City Southern 2.94% 7. MGIC Investment Corp 2.81% 8. American Int l Group 2.80% 9. DR Horton Inc 2.73% 10. Radian Group Inc 2.66% GLQ 1. Citigroup, Inc. 4.96% 2. Bank of America Corp 4.76% 3. Lam Research Corp 4.05% 4. Essent Group, Ltd. 3.54% 5. Liberty Ventures - Series A 3.48% 6. Lennar Corp. - Class A 3.26% 7. American Int l Group 3.01% 8. Tempur-Pedic Intl 2.92% 9. Kansas City Southern 2.90% 10. MGIC Investment Corp 2.75% GLO 1. Citigroup, Inc. 4.97% 2. Bank of America Corp 4.77% 3. Lam Research Corp 3.66% 4. Lennar Corp. - Class A 3.29% 5. Liberty Ventures - Series A 3.07% 6. American Int l Group 3.04% 7. Kansas City Southern 2.89% 8. MGIC Investment Corp 2.77% 9. DR Horton Inc 2.72% 10. Radian Group Inc 2.63% ^ Holdings are subject to change. Only long positions are listed. Please see the full fund portfolio holdings under Fund Information on the Clough Global Website. Past performance is no guarantee of future results.

4 This letter is provided for informational purposes only and is not an offer to purchase or sell shares. Clough Global Allocation Fund, Clough Global Equity Fund and Clough Opportunities Fund are closed-end funds, which are traded on the New York Stock Exchange AMEX, and does not continuously issue shares for sale as open-end mutual funds do. The market price of a closed end Fund is based on the market s value. The information in this letter represents the opinions of the individual Portfolio Managers and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is no guarantee of future results. GDP: Gross Domestic Product EBITDA: Earnings before interest, tax, depreciation and amortization TOPIX: Tokyo Stock Price Index Japan Nikkei 400: The JPX-Nikkei Index 400 is composed of companies with high appeal for investors, which meet requirements of global investment standards, such as efficient use of capital and investor-focused management perspectives. Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Return on Investment: A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. Talking our book: is a phrase used to describe what portfolio managers are doing when they discuss their portfolio holdings. Tangible Book Value: Computed by deducting intangible assets, start-up expenses, and deferred financing costs from the firm s normal book value (BV). Free cash flow: a way of looking at a business s cash flow to see what is available for distribution among all the securities holders of a corporate entity. Free Cash Flow Yield: An overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. MSCI All Country World Index: A market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. MSCI All World Index ex-us: An index that captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets countries. MSCI World Index: a stock market index of world stocks. It is maintained by MSCI Inc. and is often used as a common benchmark for world or global stock funds. The index includes a collection of stocks of all the developed markets in the world as defined by MSCI. Russell 2000: An index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. The S&P 500 Index: Broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks commonly known as the Standard & Poor s 500 or S&P 500. Index is unmanaged. It is not possible to invest directly in an Index. The net asset value (NAV) of a closed-end fund is the market price of the underlying investments (i.e., stocks and bonds) in the fund s portfolio, minus liabilities, divided by the total number of fund shares outstanding. However, the fund also has a market price; the value of which it trades on an exchange. This market price can be more or less than its NAV. RISKS An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, annual report or semiannual report which contains this and other information visit or call Read them carefully before investing. The Fund s distribution policy will, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a return of capital resulting in less of a shareholder s assets being invested in the Fund and, over time, increase the Fund s expense ratio. Distributions may be paid from sources of income other than ordinary income, such as net realized short-term capital gains, net realized longterm capital gains and return of capital. Based on current estimates, we anticipate the most recent distribution has been paid from short-term and long-term capital gains. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. If a distribution includes anything other than net investment income, the Fund provides a Section 19(a) notice of the best estimate of its distribution sources at that time. These estimates may not match the final tax characterization (for the full year s distributions) contained in shareholders 1099-DIV forms after the end of the year. As a non-diversified investment company under the 1940 Act, the Fund is not limited in the proportion of its assets that may be invested in securities of a single issuer, and accordingly, may invest a greater portion of its assets in a more limited number of issuers than a diversified fund. The Fund s investments in securities of foreign issuers are subject to risks not usually associated with owning securities of U.S. issuers. These risks can include fluctuations in foreign currencies, foreign currency exchange controls, social, political and economic instability, differences in securities regulation and trading, expropriation or nationalization of assets, and foreign taxation issues. The Fund s investments in preferred stocks and bonds of below investment grade quality (commonly referred to as high yield or junk bonds ), if any, are predominately speculative because of the credit risk of their issuers. An investment by the Fund in REITs will subject it to various risks. The first, real estate industry risk, is the risk that the REIT share prices will decline because of adverse developments affecting the real estate industry and real property values. In general, real estate values can be affected

5 by a variety of factors, including supply and demand for properties, the economic health of the country or of different regions, and the strength of specific industries that rent properties. The second, investment style risk, is the risk that returns from REITs which typically are small or medium capitalization stocks will trail returns from the overall stock market. The third, interest rate risk, is the risk that changes in interest rates may hurt real estate values or make REIT shares less attractive than other income-producing investments. Credit risk is the risk that an issuer of a preferred or debt security will become unable to meet its obligation to make dividend, interest and principal payments. Interest rate risk is the risk that preferred stocks paying fixed dividend rates and fixed-rate debt securities will decline in value because of changes in market interest rates. When interest rates rise the market value of such securities generally will fall. Derivative transactions (such as futures contracts and options thereon, options, swaps, and short sales) subject the Fund to increased risk of principal loss due to imperfect correlation or unexpected price or interest rate movements. Compared to investment companies that focus only on large companies, the Fund s share price may be more volatile because it also invests in small and medium capitalization companies. CLO /31/15