ADX - ADX: Reinvesting Or Not Makes A Difference - Maybe

2023-05-31 09:00:00 ET

Summary

• The Adams Diversified Equity Fund employs a fundamental, technical, and quantitative analysis with a bottom-up stock-picking approach. They target outperforming the S&P 500 Index.
• The article takes a look at ADX and measures its performance against its proclaimed goal; outperforming ETFs like SPY.
• Whether ADX achieved its goal of outperformance depends on what investors did with their dividends and the time period. Understanding the calculations also matters.
• While not always the case, ADX investors should reinvest their payouts to achieve the best return from their investment in this CEF. This is commonly referred to as DRIPing.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

The Closed-End-Fund reviewed here, the Adams Diversified Equity Fund ( ADX ) is managed by Adams Express, a firm that dates back to 1854! The CEF was launched in 1929, just weeks before the market crash; how is that for timing! Several years ago, I wrote Not DRIPing High-Yield Securities Is Costly To Your ROI , which examined if skipping dividend reinvestment made a difference. When comparing the ADX CEF against the SPDR S&P 500 Trust ETF ( SPY ), we see that one decision makes a huge difference.

Adams Diversified Equity Fund review

Seeking Alpha describes this CEF as:

The Fund is an internally-managed diversified large-cap U.S. equity fund that seeks to outperform the S&P 500 and invests at least 80% of its assets in highly liquid S&P 500 stocks. The Fund’s investment objectives are preservation of capital, reasonable income, and opportunity for capital gain. The firm employs a fundamental, technical and quantitative analysis with a bottom-up stock picking approach, while focusing on earnings growth prospects, financial strength, cash flow generation, macro-economics, capital allocation, market competition, profitability. It obtains external research to complement its in-house research to make its investments. ADX started in 1929.

ADX has $2.25b in AUM with fees of 59bps. Unlike other CEFs, no leverage is employed. The yield varies widely and is very dependent on capital gains, but not ROC, as will be shown later. ADX currently is selling at a 16+% discount. While deeper than usual, ADX has been mostly at a 12+% discount for years.

Holdings review

The latest sector allocations are as follows and match closely with S&P 500 Index funds, which ADX benchmarks against.

The list and Top 10 weighting also match up well with S&P 500 index funds. Liking what ADX holds is more important than whether to reinvest or take the payouts.

Distribution review

As can be seen, a majority of the annual payout is contained in the last payment of the year. Recent years can be seen with LTCG comprising most of the annual distributions, which the 19-a statements confirm were mainly paid in December.

Examining effect of DRIPing

I use the dividendchannel.com for this analysis and will compare ADX against SPY since it invests based on the benchmark ADX measures itself against. I have not been able to confirm if the site assumes taken dividends earn anything but until last summer, there was almost a decade when that would not have been much. I did run some simulations for 2022-23 and it appears they don't assume what earnings might be generated by taking the payouts, or by not reinvesting.

It took me awhile to understand some of the field definitions:

• Dividends reinvested/share: This is the actual annual payout, unrelated to the number of shares owned with or without reinvestment.
• Ending investment: For reinvestment, it equals Ending Shares & Ending Price. For Non-reinvestment, the dividends paid are added to the Beginning Shares * Ending Price.

So while ADX only trailed SPY since 8/1/1995 by 67bps when dividends were reinvested, the gap was 320bps for those who took both sets of payouts. SPY investors were hurt less mostly by the fact a majority of the CAGR was from the price increase, not the dividends themselves, as was the case for ADX investors.

To confirm what I saw between ADX and SPY, I ran another seasoned equity CEF, the Central Securities Closed-End-Fund ( CET ) against SPY. The same results are shown; reinvesting paid off even when the CEF price was higher at the end.

Portfolio strategy

There is, of course, no definitive answer to the questions posed by this article: "Does reinvesting matter"? Two important factors help determine that answer:

• Yield: Higher the yield, the bigger the impact should be.
• Performance: Dollar-Cost-Averaging down should favor re-investors, assuming the price eventually recovers.

It would be great if the same strategy worked 100% of the time the way the investor needed it to. Such an ideal world, unfortunately, doesn't exist. While that is the case here too, ADX investors should DRIP their payouts to achieve the best return from their investment in this CEF. Those who DRIPed earn almost twice compared to those who did not. Of course, neither strategy will make a bad investment choice into a winner!

Final thoughts

Income investor like CEFs like ADX or CET for their high yields. Option-writing ETFs are prized for the same reason. As shown above, taking that income has been costly over a long period. That isn't always the case though. Here I added the popular JPMorgan Equity Premium Income ETF ( JEPI ) as another example how which choice isn't the best one when looking at different time periods.

Results are not consistent based on either price change or dividends paid as percent of cost.

So while over an extended period of time, both ADX and CET investors did best by reinvesting, over the last three years that has not been the case. Such is the life of an active investor!

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