VEA - BGY: High-Yielding Diversified Global Equity CEF Available At Strong Discount

2023-03-29 10:56:49 ET

Summary

• BlackRock Enhanced International Dividend Trust pays monthly dividends and generates strong yields, mostly within a range of 7 percent to 10 percent. As a result, the annual average total return has been decent.
• Peer global equity funds like VEA and IEFA not only failed to generate such a strong yield but also failed to match BGY’s 5-year annual average total return.
• BGY diversified its assets among developed and emerging markets. Its primary markets of UK, France, and the U.S. are recovering much faster than was expected.
• When the market went down after March 2020 and many steadily dividend-paying companies reduced their payouts, BGY was able to sustain its payout.

~ by Snehasish Chaudhuri, MBA (Finance)

BlackRock Enhanced International Dividend Trust ( BGY ) is a closed-end equity mutual fund that invests in dividend-paying international stocks. The fund invests in diversified sectors and also writes options on the stocks it is long on. It has higher exposures in the equity markets of the United Kingdom and France. Stocks from industrial, healthcare, information & communication technology ((ICT)) and financial sectors account for more than two-thirds of its total portfolio. The fund pays monthly dividends and generates a strong yield.

As a result, the annual average total return has been decent (although not attractive) over the long run. The fund is currently trading at around $30, at a significant discount of 13.3 percent from its NAV. As BGY is available at a great price, a sustainable yield will certainly make this fund a very good pick.

Investment Strategy Of BlackRock Enhanced International Dividend Trust

Launched by BlackRock, Inc. and co-managed by BlackRock Advisors, LLC and BlackRock International Limited, BGY invests in public equity markets across the globe, including the United States. Its primary investment objective is to seek current income, while long-term capital appreciation remains on the backdrop. BGY seeks to achieve its investment objectives by investing primarily in dividend-paying stocks as well as gaining from the premiums received on writing call options. At present, the fund has sold call options in around 40 percent of its portfolio. In my view, this strategy should work well in bearish or depressed market situations, like we are witnessing at present.

Annual Average Total Return Of BGY Was Not High Despite Its Strong Yield

BlackRock Enhanced International Dividend Trust benchmarks itself against the performance of S&P Global ex-U.S. Broad Market Index. BGY comprises almost 130 equity stocks that are selected through represented sampling techniques. The fund has an expense ratio of 1.1 percent and a portfolio turnover ratio of 41 percent. BGY generates strong yields , mostly within a range of 7 to 10 percent. Since 2013, BGY's average yield has stood at 8.1 percent. However, BGY's annual average total return was not high despite such a strong yield. During 2016 and 2022, average total return was less than 6 percent. This implies the fund has been performing poorly in terms of its price growth. Due to this, I believe that BGY suits only income-seeking investors.

BGY Has Diversified Its Assets Among Developed And Emerging Markets

BlackRock Enhanced International Dividend Trust provides exposure to steady dividend-paying companies with quality and growth characteristics, belonging to some targeted developed international and emerging markets. Among the emerging markets, this global CEF invests primarily in India, Taiwan, Mexico, Indonesia, Hong Kong and China. These six markets are undoubtedly the most promising and least risky among all the emerging economies. Almost one-sixth of BGY's assets under management are invested in these markets.

More than 22 percent is invested in stocks from the United Kingdom. Among other developed markets, France, the United States, Spain, Switzerland, Singapore, Denmark, Japan, Canada, Sweden, and Netherlands account for almost three-fifths of its total assets invested in these markets. All these markets, although witnessing a relatively lower growth rate, are having best of rating for their sovereign bonds. Most importantly, these economies are not facing any major political or economic challenges like Russia does.

BGY Has Invested Almost Two-Third Of Its Assets In Four Promising Sectors

BlackRock Enhanced International Dividend Trust has an asset base of $624 million. More than 67 percent of its assets are invested in equities from four sectors - financial. Healthcare, industrial, and information & communication technology - sectors possibly having above-average growth prospects in the coming decade. Innovative and path-breaking technological changes are creating new benchmarks and compelling overhaul of industrial structures. Since the outbreak of the Covid-19 pandemic, demand for better healthcare facilities has been on the rise for the last three years and will continue for a few more years. BGY's primary markets of the UK, France, and the United States are recovering much faster than what many economists have predicted.

BGY's Price Performance Was Unsatisfactory During The Past Five Years

Significant investments in the healthcare sector included pharmaceutical giants such as Novo Nordisk A/S ( NVO ), EssilorLuxottica Société anonyme ( ESLOF ), Sanofi ( SNY ), AstraZeneca PLC ( AZN ), Lonza Group AG ( LZAGF ). Within the industrial space, IGD invested significantly in Otis Worldwide Corporation ( OTIS ), Epiroc Aktiebolag ( EPOKY ), Schneider Electric S.E. ( SBGSF ), and Ferguson plc ( FERG ). All these stocks recorded positive price growth during the past five years. Barring SNY and ESLOF, all other stocks recorded a price growth in excess of 11.6 percent CAGR. That's quite impressive, considering BGY's negative price growth during the same period.

ICT stocks like RELX PLC ( RELX ), Taiwan Semiconductor Manufacturing Co. Ltd. ( TSM ), MediaTek Inc. ( MDTKF ), TELUS Corporation ( TU ), Koninklijke KPN N.V. ( KKPNF ); and financial stocks like Prudential plc ( PUK ), HDFC Bank Ltd. ( HDB ), United Overseas Bank Limited ( UOVEY ), and Visa Inc. ( V ) were also included among its top 25 investments. Here, it is to be noted that BGY stayed away from investing in the major U.S.-based banking stocks. During the past 5 years, barring RELX, TSM, and HDB; all other stocks generated a price growth lower than 3.5 percent CAGR. BlackRock Enhanced International Dividend Trust, too, recorded a price loss of almost 13 percent over the past five years.

This resulted primarily from two reasons, a) BGY's emphasis on dividend rather than price growth, and b) the performance of ICT and financial stocks, which performed quite opposite to that of BGY's healthcare and industrial portfolio. Top investments of BlackRock Enhanced International Dividend Trust also included stocks of a good number of retail firms and consumer durable companies such as Reckitt Benckiser Group plc ( RBGPF ), Diageo plc ( DEO ), Kering SA ( PPRUF ), Wal-Mart de México, S.A.B. de C.V. ( WMMVF ), Industria de Diseño Textil, S.A. ( IDEXF ), Taylor Wimpey plc ( TWODF ), and LVMH Moët Hennessy - Louis Vuitton, Société Européenne ( LVMHF ). These stocks pay strong dividends, which again enabled BGY to achieve its primary investment objective of generating strong current income over the long run.

How Is The Monthly Payout And Option Writing Strategy Beneficial For BGY?

With monthly dividend distributions, the BlackRock Enhanced International Dividend Trust is checking all the right boxes - it transforms international equity market returns into monthly dividends with a strong yield. However, this option writing strategy may not work during all market conditions, especially during bullish markets. When the value of the stock against which the covered call has been written climbs significantly above the strike price, the fund will suffer losses as it will be deterred from obtaining the benefit of the price appreciation on those shares. This implies that option writing is better during a flat or falling market. BGY does what it is supposed to in terms of utilizing implied volatility and covered calls to generate a total return in a down market.

BGY Performed Better Than Other International Diversified Equity Funds

When the market went down after March 2020, and various steadily dividend-paying companies reduced or suspended their payouts due to the uncertainty created out of Covid-19 pandemic and lockdown measures, BGY was able to sustain its payouts. Also, bearing in mind BGY's secondary objective, which is capital appreciation, a comparison with its peer funds may provide us a fair idea about its achievement. Vanguard FTSE Developed Markets ETF ( VEA ) and BTC iShares Core MSCI EAFE ETF ( IEFA ) are two such funds, which not only failed to generate such a strong yield but also failed to match BGY's annual average total returns. Both these funds held diversified equity stocks from developed markets all over the globe and offered healthy pay-outs.

As BGY is available at a great price, a sustainable yield will certainly make this fund a very good pick. The fund pays monthly dividends and generates strong yields, mostly within a range of 7 to 10 percent. As a result, the annual average total return has been decent (although not attractive) over the long run. BGY has diversified its assets among developed and emerging markets. Its primary markets of the UK, France, and US are recovering much faster than what was thought earlier.

BlackRock Enhanced International Dividend Trust's yield is sustainable to a large extent, especially during a bearish market scenario. Even if BGY's yield declines considerably, i.e., the average yield comes down to a level of 6 percent (almost two-thirds of its current level), that also will be good enough for income-seeking investors to stay invested in the BlackRock Enhanced International Dividend Trust.

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