FCO - FCO: Losses Proceed On Schedule

• FCO was one of the easiest setups to identify as a strong sell.
• Yield chasing exercise had been taken to real extremes in this case.
• The losses have proceeded on schedule, but we are not done yet.

Aiming to provide high current income by investing primarily in fixed income securities, Aberdeen Global Income Fund, Inc. ( FCO ) has enthusiastically delivered on this front. With 84 cents of annual distribution, it has had the drooling income investor chase it all the way to almost a 50% premium to NAV in recent times.

The absurd premium caught our eye, and we have dedicated several articles to this since 2021, unequivocally recommending a sell each time.

The most recent piece had us come up with a new rating for this fund as a mere sell rating would not have adequately conveyed our thoughts. Although the price and NAV action were panning out as anticipated, the fundamentals continued to remain horrible. We concluded that piece with:

This is how we see things playing out. At some point we see investors coming to their senses and dropping this closer to NAV. So far the fund has maintained the high distribution, likely to facilitate issuance of units above par. Once NAV and price meet, the fund's incentives will likely change and the distribution will be cut, probably to 1-2 cents a month. This will make the fund more "sustainable" and allow management fees to be collected over a longer period of time. You can expect the price to drop 10-20% below NAV at that point. As painful as the journey over the last 14 months has been, the next 14 months will likely be worse. We downgrade this to a "Get Out Of Dodge".

Source: Aberdeen Global Income: 14.79% Distribution Achieves Terminal Velocity

Time to check in again with this high-income gem and review what, if anything has changed since we wrote about it in May.

Recent Performance

With an expense ratio of 2.72% and an average coupon of 5.92%, the fund is woefully short of net earnings to distribute to its unitholders.

It has doggedly maintained its $0.07 per month distribution despite a shortfall in earnings resulting in continued NAV depletion. With NAV depletion, the premium is slowly whittling down, reflecting in FCO's performance.

As we can see the performance, both price and NAV have been poor against the category. Even though the comparable US Global Income funds have lost 15% on average on NAV over a one-year time frame, FCO has the distinction of losing 20%. The price performance is even worse in comparison, with FCO losing twice as much as the category average. This has been caused by premium compression, which we repeatedly warned about. The investors that bought in the past couple of years have come out of this the poorest having bought this closed end fund at a premium which was not warranted.

Point to note, the performance above is inclusive of the lofty distributions, i.e. these are total returns.

Outlook

Assuming interest rates remain unchanged, FCO can earn close to 7% ($5.92/$85.96).

This is a simplistic view and one that is ignoring default and currency risks. Those are big risks for this fund as it has exposure mainly in the lowest rungs of the bond Universe.

71% plus of the portfolio comes from BB lower rated bonds. Currency risk remains equally daunting, with more than half of assets outside the US. But nonetheless, we will give them the benefit of the doubt and assume they can earn this return.

Even if they do, taking the 3.0% expense ratio into account, it will get to retain around 4.0%. Our expense ratio estimates a real-time estimate view versus the official numbers from the semi-annual report. Maintaining the 18% distribution on NAV will require constant liquidations to raise cash, and the NAV will drop further. FCO is currently trying to stop this bleed by issuing units to the savvy income investors at the current market premiums.

Over a million shares have been issued this year to stem the flow, and the NAV is still on a downward trajectory. The reason is that issuing one million shares above NAV adds about $1 million extra. That distributed over the original nine million shares, barely boosts NAV per share by about 10 cents. The overdistribution has been running at about 70 cents in the last 12 months.

Verdict

This fund continues to remain a strong sell in our opinion . Even based on just the 10-year total return on NAV, which comes in at a painful negative 1.4% per annum, it would be hard to even argue a "hold" rating.

"There is no free lunch" would be our message to the investors choosing to buy this at a premium to get in on the "high yield". If this fund traded at a discount like it has done for most of its existence, the management would have cut the distributions by now. As we stand, the fund continues this policy of winding down assets in a most unique manner.

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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