WDIV - AOD: Continuing To Match The World Stock Index Performance

Summary

• AOD is an equities-focused closed-end fund.
• The CEF focuses on large capitalization global equities that pay dividends.
• The CEF's total return performance has been in line with the Vanguard Total World Stock Index Fund in the past year.
• The CEF is trading with a -12% discount to NAV but has seen its discount trade in a very narrow range since the start of the equities bear market.
• The fund falls in the Large Capitalization/Blend Morningstar bucket.

Thesis

The Aberdeen Total Dynamic Dividend Fund (AOD) is a closed end fund focused on equities. As per the fund's literature, AOD's principal objective is current dividend income followed by long-term growth of capital. To that end, the fund pays a monthly dividend, which currently generates an 8% yield. The fund falls in the Large Capitalization / Blend bucket, when compared to the relevant Morningstar portfolio categorization criteria.

The closest index comparison is the Vanguard Total World Stock Index Fund ETF (VT). Ultimately AOD transforms global equities returns into monthly dividends. The fund has a de-minimis leverage ratio (sub 2%) and should represent an alpha generating vehicle versus the index. The fund has the ability to write covered calls or buy puts on up to 10% of the portfolio:

In order to hedge against adverse market shifts, the Fund may utilize up to 10% of its total assets (in addition to the 10% limit applicable to options on stock indices described below) to purchase put and call options on securities. The Fund will also, in certain situations, augment its investment positions by purchasing call options, both on specific equity securities, as well as securities representing exposure to equity sectors or indices and fixed income indices. In addition, the Fund may seek to increase its income or may hedge a portion of its portfolio investments through writing (i.e., selling) covered put and call options

AOD is a CEF wrapper that transforms equity returns into monthly dividends. Due to poor equity performance in the past year, the structure is now utilizing over 60% in ROC for its monthly disbursements. We expect high ROC utilization to persist if the global stock markets do not start posting consistent positive results. AOD does what it is supposed to, and given the manager's track record, will continue to closely match from a total return perspective VT's performance.

Performance

The CEF has continued to perform in line with the Vanguard Total World Stock Index Fund in the past year:

We have also introduced here another point of comparison, namely the SPDR S&P Global Dividend ETF (WDIV), which is an ETF focused on dividend paying global stocks.

Ultimately an investor should keep in mind that the CEF structure purely converts the underlying risk factor (in this case world equities) into dividends. When compared on a total return basis, instruments can show which wrapper outperforms. Total return means that dividends are included, and that is the appropriate way to compare CEFs with ETFs.

Longer term AOD and VT exhibit the same return profile, while WDIV underperforms:

This might be a story of WDIV being poorly set-up, rather than anything else. Ultimately AOD continues to closely mirror VT, while providing regular dividends. An investor who is comfortable with capital gains should go for VT, while investors looking for dividends should choose AOD.

Premium/Discount to NAV

The fund's discount has been trading in a very narrow range this past year:

We can see how the CEF's discount to net asset value has fluctuated between -10% and -15% in the past year. This fund has a low beta to risk-on / risk-off environments, so it represents a more appealing buy and hold choice versus other instruments. A high beta to market conditions here simply means the fund would experience significant volatility, concurrently with market wide moves.

Distributions

Given the negative performance in global equities in the past year, the fund is currently utilizing a high percentage of return of capital:

As of its latest distribution, 63% of the cash disbursed is actually return of capital (i.e. your own money). It is normal and expected though for monthly paying CEFs to utilize ROC when the underlying risk factor returns are just not there. Long term, however, a high utilization of ROC can be destructive. If 2023 turns out to be another year with negative global stock returns, the fund might need to think about lowering the dividend amount. 63% ROC figures are not sustainable long term.

Conclusion

AOD is an equities focused closed end fund. The vehicle encompasses global dividend paying stocks, and has a total return performance closely aligned with the Vanguard Total World Stock Index Fund. Given global equity markets underperformance, AOD is currently utilizing over 60% ROC in its distributions. The fund is trading with a -12% discount to net asset value, which we expect to persist. This CEF has seen its discount trade in a very narrow range in the past year, and does not represent a high beta play on market risk-on/risk-off moves. Think of AOD as structural wrapper to generate monthly income from world equities markets.

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