Unlocking Income and Value in Virtus Convertible & Income Fund's NCV.PRA Preferred Shares

In a landscape where steady income and capital preservation are hard to find, the Virtus Convertible & Income Fund's 5.625% Series A Preferred Shares (NCV.PRA) present a compelling opportunity. Trading at a 14.12% discount to liquidation value while offering a 6.55% current yield, these preferred shares combine robust income potential with the possibility of price appreciation. For conservative investors seeking to balance risk and reward, NCV.PRA's post-call date dynamics and discounted valuation create a rare entry point.

The Case for NCV.PRA: Yield, Discount, and Stability

1. A 6.55% Yield in a Low-Yield World

NCV.PRA's current yield of 6.55% stands out in an environment where traditional fixed-income instruments struggle to keep pace with inflation. This yield arises from two factors: the shares' $1.40625 annual dividend (equivalent to a 5.625% coupon relative to their $25 liquidation value) and their current market price of $21.47—a 14.12% discount to par.

The dividend has remained consistent since the shares' 2018 issuance, with the latest quarterly payout of $0.3515625 set for June 30. Investors can expect steady quarterly distributions, a critical feature in an era of volatile markets.

2. A 14.12% Discount to Liquidation Value: Hidden Value or Risk?

The shares' trading at $21.47—$3.53 below their $25 liquidation value—creates a margin of safety. Should the market reassess NCV.PRA's risk profile or the fund's performance improves, the share price could rebound toward par, unlocking capital gains.

Critics might argue that the discount reflects underlying risks, such as the fund's 37.34% leverage ratio or its exposure to below-investment-grade securities (50.96% of its fixed-income holdings). However, the discount also suggests that investors are overly pessimistic about the fund's ability to navigate rising interest rates or economic headwinds—a sentiment that could reverse if the broader market stabilizes.

3. Post-Call Date Dynamics: A Call for Caution or Confidence?

NCV.PRA's call date passed on September 20, 2023, meaning the fund can now redeem shares at $25 per share plus accrued dividends at any time. While this might seem risky—why hold a callable security at a discount?—the math works in investors' favor.

If the fund were to call the shares, holders would receive the full $25 liquidation value, effectively erasing the discount. However, the fund has no incentive to do so while shares trade below par: redeeming at $25 would cost more than leaving them outstanding. This creates a “put option” for investors: the shares are effectively trading at a price that assumes a worst-case scenario, but the call feature acts as a floor.

Risks to Consider

While NCV.PRA's yield and discount are attractive, investors must weigh the following risks:

• Interest Rate Sensitivity: Preferred shares typically decline in value when rates rise. With the Fed's policy uncertain, NCV.PRA could face further pressure if yields climb.
• Closed-End Fund Discounts: Like all CEFs, NCV.PRA's price may lag its net asset value (NAV) due to supply-demand imbalances or investor sentiment.
• Leverage Exposure: The fund's 37.34% leverage amplifies both gains and losses, adding volatility to the preferred shares.

Why NCV.PRA Deserves a Place in Conservative Portfolios

Despite these risks, NCV.PRA offers a rare blend of income and capital return potential:
- The 6.55% yield provides a hedge against inflation and a steady cash flow.
- The 14.12% discount creates a cushion against downside risk.
- The post-call date structure eliminates uncertainty around redemption timing, as the fund has no economic incentive to call shares below par.

For investors with a 12–18 month horizon, NCV.PRA could deliver a double win: rising dividends if the fund's NAV improves and price appreciation if the discount narrows. Even in a stagnant market, the yield alone justifies a position.

Final Verdict: Act Now Before the Discount Closes

NCV.PRA isn't a high-risk gamble—it's a calculated bet on the fund's resilience and the eventual reversion of its valuation toward liquidation value. With a 6.55% yield, a 14.12% discount, and post-call stability, this preferred share offers a compelling entry point for income-focused investors.

The clock is ticking. As interest rates stabilize or dip, and the market reevaluates CEF discounts, NCV.PRA could quickly narrow its valuation gap. Don't miss this chance to lock in high income and the potential for capital gains.

Investors should consult the fund's prospectus and consider their risk tolerance before committing.