RA - AGD: A Solid Global Fund Avoiding Destructive ROC

2023-09-05 10:04:32 ET

Summary

• Like most other closed end funds we have covered on this platform, this one too aims to provide high current income to its unitholders.
• Unlike several of them though, this fund is disciplined in its payout.
• We explore this fund and provide our thoughts.

Several closed-end funds that we have covered on this platform cater to the income crowd. They aim to earn high current income to pass on to its unitholders in the form of distributions. This endeavor gets challenging when they have to deliver irrespective of the market climate. They have to think long and hard before taking a step to even reduce the distributions, as it likely would result in their investors to move on to their competitors. That is why, when they cannot earn enough to cover the lofty distributions that unitholders have come to expect from them, they will start returning your capital back to you via the monthly payouts. The impact is reflected in the depleting net asset value or NAV. The typical income investor sees yield as the only goal and the NAV depletion is ignored. As a result, the fund can trade at a premium (i.e. above its NAV) and unitholders take that as yet another sign that all is well. The jig can go on for long, but there is only so much of the investors capital that can be returned before a distribution cut becomes a reality. The investors that were the last ones to get in feel the biggest impact. They did not get a chance to enjoy the distributions and they also participate in the capital losses as the fund premium journeys to a discount.

We recently wrote about Brookfield Real Assets Income Fund Inc. ( RA ), a textbook case in the above exercise. No prizes for guessing when the dividend cut was announced.

Today, though is not about RA and its kind. Instead, today we will discuss a closed end fund that, at first glance, appears to be one of the better ones.

The Fund

abrdn Global Dynamic Dividend Fund (AGD), like its brethren, has a primary objective of providing high current income to its unitholders. It also seeks capital appreciation over the long term, but that is secondary. AGD benchmarks its performance to the MSCI All Country World Index, which represents the developed and emerging stock markets. Morningstar provides a succinct explanation of this fund's investment strategy.

The Fund combines three research-driven investment strategies – dividend capture, value and growth – to maximize the amount of distributed dividend income that qualifies for reduced federal income tax rates (currently capped at 20%) and to identify companies globally with the potential for dividend increases and capital appreciation. The Fund uses a multi-cap, multi-sector, multi-style approach to invest in the securities of issuers of any capitalization level (small, mid or large) and in any sector of industry.

While close to 60% of AGD's portfolio was invested in US securities, the fund did have a fair portion of its portfolio invested in Europe and Asia Pacific at July 31.

As of the same date, AGD had a presence in a varied number of sectors. Yes, close to half of the portfolio was concentrated in the information technology, financials and the health care sectors, however, the fund did have a decent presence in the industrial, consumer discretionary and consumer staples sectors. Utilities and energy constituted a less substantial portion.

The top ten holdings noted in the July 31 fund factsheet included several familiar names, which is unsurprising as majority of the portfolio is invested in US securities.

The top three in the above list also aligns with the sector concentration of this fund. Moving on to expenses, around 1% is typical for equity closed end funds, making the 1.18% for AGD run of the mill in that regard.

What is extraordinary is how AGD's NAV has beaten its category in each time period since inception, save for this year.

In terms of performance versus its benchmark (as of July 31 versus Aug 31 above), it has lagged, more so this year than others.

The benchmark enjoys the advantage of having no expenses, but the underperformance at times is beyond what can be explained by that handicap. The silver lining in our opinion is the discipline AGD shows in their distribution payouts. Take a look at how much of their distribution constitutes return of investors capital.

We went back a couple more years and the picture remains the same. The management has a grip on reality, and a long term focus. In contrast, this is how RA's distribution history looks like.

Verdict

Distributing $0.065 monthly, AGD yields around 8.4% on the market price. What we are more interested in however, is the yield on NAV, which is around 7.3%.

So AGD needs to earn 7.3% to meet its distribution obligations, without involving return of capital. Sure, there are up and down periods, but the shortfall in one year can be overcome by an above average performance in another. Referring back to the performance of this fund, it has cumulatively met 7.3% annualized (more or less) in its 10-year performance.

For those not ready to the work themselves, this CEF is still a relatively good choice at present.

The wider than average discount to NAV alongside a negative 1.12 Z-score make this modestly appealing for those with a more of a buy and hold mentality.

What we are not too gung ho about and what prevents us from slapping a buy rating on AGD is its performance in 2022.

It also is too exposed to technology and financial sectors at this stage of the cycle. Our investing style is to adapt to the macro environment, which has called for a defensive stance in much of the last three years. We focus heavily on capital preservation in all environments. We have proven that it is possible to make a healthy return irrespective of the noise, as long as one listens to the signal. The proof is in the pudding as we were able to navigate 2022 a bit better in our marketplace service by adjusting our strategy in anticipation of the rates hikes. So while we tip our hat to AGD for its distribution discipline and its financial health for most of its existence, we are not ready to throw out hat into the ring as yet. This CEF is a hold for us.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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