ASGI - ASGI Vs. UTF: Battle Of The High Yielders

2023-10-19 17:03:01 ET

Summary

• abrdn Global Infrastructure Income Fund is a closed-end fund that aims to provide high total return to its investors with a focus on current income.
• Cohen & Steers Infrastructure Fund has the same aim and also invests in infrastructure companies.
• We review the two in light of the current environment and vote for one.

abrdn Global Infrastructure Income Fund ( ASGI ) is a closed end fund that scouts the globe for its portfolio holdings and the three "e's" missing in its name.

It aims to deliver a "high level of total return with an emphasis on current income". Its portfolio comprises equities of infrastructure companies, both the public and private kind. The term infrastructure, encompasses a broad range of services. On ASGI's website, it is stated "as assets that provide a service to society". The most recent data available, shows industrials and utilities making up close to two thirds of the portfolio.

The top 10 holdings list at August 31 occupied around a fourth of the portfolio and was mostly made up of foreign names. The one North American name we saw on the list, NextEra Energy, Inc. ( NEE ) is very familiar to us .

ASGI measures its performance in comparison to the S&P Global Infrastructure Index, which its seems to have beaten handily in all time frames (on NAV) since its inception, in July 2020.

The NAV has suffered a beating since then however. We can see though, that it is not going through this pain alone. The NAV depression has been shared by an overwhelming crowd favorite, especially on this platform.

Cohen & Steers Infrastructure Fund ( UTF ) , has the same goal as ASGI though it does not have to go scouting for missing letters. Its raison d'etre is "total return, with an emphasis on income". While this one too scours the globe for its infrastructure fix, it had a higher concentration of US securities versus ASGI as per last published data.

The UTF portfolio is not restricted to equities alone, fixed income finds a place in it too.

The top 10 holdings list has the infamous NEE leading the charge at 4.5%, along with several known names in the infrastructure field.

This fund benchmark's its performance to a combo of two indices, 80% FTSE Global Core Infrastructure 50/50 Net Tax Index / 20% ICE BofA Fixed Rate Preferred Index. The benchmark for this fund has undergone a couple of changes since its inception in 2004, the aforementioned ones being in effect since 2015. UTF has done better than its linked indices over the longer term (3 years and more), but it cannot catch a break over the last year.

With the background set for these two, we get to the main purpose of our work today. One of our recent pieces compared two closed end funds, Barings Corporate Investors ( MCI ) and PIMCO Corporate and Income Opportunity Fund ( PTY ). We put our weight behind the former and explained our reasons for the same. It's only been a month since that piece, but it has not been unpleasant to see some of the exorbitant PTY premium unwind.

In another piece, we highlighted the silly premium for Tekla World Healthcare Fund ( THW ) versus Tekla Healthcare Opportunities Fund ( THQ ) and that story has played out predictably as well.

We are going to do the same comparison with ASGI and UTF playing the main leads and tell you why the former outclasses the latter, if you consider the metrics that matter today.

Distributions

ASGI distributes 12 cents on a monthly basis, which makes its yield on current price ($15.49) around 9.33% and its yield on the net asset value or NAV ($18.55) around 7.76%. UTF also distributes monthly, the amount is higher at 15.5 cents. Its yield on current price ($19.32) is around 9.63% and its yield on NAV ($20.12) is around 9.24%. Yes, both trade at a discount to NAV, unlike the dichotomy we saw between MCI and PTY. The magnitude of the discount in this case is the crux here however and we will have more on that later in this piece.

Leverage

By now we have all had a chance to digest the downside of leverage. It's been over a year since the ZIRP (Zero Interest Rate Policy) has become Z-RIP (Zeros, Rest In Peace). The celebrations that lasted a decade and reached a crescendo in 2020-2021, have wound down. It is not easy however, for closed end funds to eliminate the borrowings since all their efforts are expended in maintaining the "high current income" promised to its core audience, aka, the income investor. They have to hold the interest of their bread and butter crowd or see their market price get butchered.

ASGI, is refreshing and anomalous in this regard. It has no leverage. Zero. Nada.

Which means, no pesky interest expense eating away at the bottom line.

UTF on the other hand has actually had an increase in leverage since we covered it, back in August. It used to be 29% then, and now close to a 33%.

This is mainly as borrowings have remained steady while equity values have fallen. While the above shows the most current picture, we can get an idea of composition of its borrowings from its semi-annual report for the period ending June 30, 2023.

A 6% interest rate on the variable debt, does tend to make the unitholders bear a higher expense for holding this fund.

The increase from 2.44% to 3.72% is almost exclusively due to interest expense, as we can see on the next line that the number excluding interest only increased by 2 basis points, compared to December 31, 2022.

One Year Performance on NAV

ASGI leads by over 7% in the total returns on NAV over the last year.

Why a comparison to the last year only? Most investments have only fully faced the leverage wrath over the last year, and hence it makes sense to review the performance over this time frame. ASGI, has however, won this race even since its inception.

Why? Because leverage could not taketh what it giveth (during ZIRP) in ASGI's case.

Premium/Discount to NAV

Both the funds are trading at a discount, ASGI at 16.50%, a tad bit more than UTF.

The latter has enjoyed a few "premium" periods over the last year, unlike ASGI, whose uniform double digit discount over the last year gives it the appearance of the proverbial wet blanket.

A Z Score indicates how far the security is from its normal trading range vis a vis discount versus premium. Both ASGI and UTF, are currently trading close to their respective extreme ranges. As a result, both have almost identical (around negative 1.4) Z-Scores.

Verdict

The leverage places UTF on the backfoot, in our opinion. Due to the absence of leverage, ASGI is better equipped to deal with the current environment and will come out ahead of the two when the dust settles. It is also likely that ASGI pricing improves relative to its NAV when investors wake up to its performance versus UTF. In the meantime, investors can choose whether to make $1.44/year by paying 84 cents on the dollar, or make $1.86/year by paying 95 cents on the dollar. We think ASGI is the one for our money and offers a solid, sustainable distribution for the medium term.

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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