GGN - GGN: Reasonable Discount Available On This High-Yielding CEF Makes It Appealing

2023-08-10 13:32:14 ET

Summary

• GAMCO Global Gold, Natural Resources & Income Trust uses a covered call strategy with high turnover and a cash component of over 17%.
• The GGN closed-end fund had a market-beating performance in the past year, generating a trailing-12-month yield of 9.63% and a total return of almost 17.5%.
• GGN has increased its allocation to gold mining and basic metal stocks while reducing its allocation in energy stocks, indicating a positive market assessment.

~ by Snehasish Chaudhuri, MBA (Finance).

During my last coverage almost a year back, I said that a series of geopolitical events such as unfavorable weather, Covid-19 pandemic-related disruptions, and the conflict between Russia and Ukraine had resulted in a shortage of supplies, thus was creating a demand & supply mismatch, which ultimately was sending commodity prices higher. The positive impacts of increasing commodity prices were already reflected in price growth for energy and commodity funds. However, such positive impacts were yet to be enjoyed by the funds involving equity of gold mining companies.

Thus, I was hopeful about a prosperous year for gold and natural resources-based funds like GAMCO Global Gold, Natural Resources & Income Trust (GGN). A year later, I want to reassess the growth prospect of this basic materials & energy fund.

GGN Uses Covered Call Strategy, which in Turn Results into High Turnover

GAMCO Global Gold, Natural Resources & Income Trust is a closed ended equity mutual fund launched by GAMCO Investors, Inc. The fund is managed by Gabelli Funds, LLC. It invests in stocks of companies principally engaged in extracting and supplying gold and natural resources. In addition to investing in common equities, GGN implements covered call strategy, through which GGN writes (sells) call options and earns a premium on it. This enables GGN to offer strong pay-outs. Currently, GGN’s short position in call options is a little over 4 percent of its total portfolio, while the long position in equities stands at almost 85 percent. 51 percent of such long positions were in overseas equity markets. Cash component is in excess of 17 percent of the entire fund.

The fund benchmarks the performance of its portfolio against the Philadelphia Gold & Silver Index, Barclays Government/Credit Bond Index, CBOE S&P 500 Buy/Write Index and Energy Select Sector Index. GGN has an asset under management of $630 million and a high expense ratio of 1.31 percent. This high expense ratio is a result of an excessively high turnover ratio of 126 percent. Turnover ratio is high because GGN writes call options on a significant portion of its portfolio. This is an unusual fund, and may seem quite risky to certain investors. But it has been able to deliver strong annual average total return despite pandemic, high interest rate, and geo-political challenges arising out of Russia’s invasion of Ukraine. Since 2019, the fund’s average total return was almost 14 percent CAGR, which is exceptionally high.

GGN had a Market-Beating Performance During the Past Twelve Months

During my last coverage, I also found that GGN's portfolio had a high cash component, which I believed would be beneficial for this fund, as GAMCO Global Gold, Natural Resources & Income Trust would be able to take advantage of better values of various stocks. This high cash phenomenon became a trend among the fund operators at that point, as the inflation stood high and there was a prospect of economic recession. As GGN was not undervalued one year back, I was skeptical about an enormous price growth (like what was broadly witnessed in the case of commodity and energy funds).

However, its double-digit yields and an extremely low price of $3.66 were good enough reasons for recommending this stock to income-seeking investors. I also found such a strong yield to be sustainable despite there being a recession looming over the U.S. market. The fund didn’t disappoint me as it generated a trailing-12-month yield of 9.63 percent, and its price went up by 6.75 percent thus resulting in a total return of almost 17.5 percent . This is almost 70 percent higher than the total return of S&P 500, which stood at little over 10 percent. Moreover, GAMCO Global Gold, Natural Resources & Income Trust offers monthly pay-outs on a consistent basis. The fund was formed during June 2005, and it has been paying a monthly dividend since then.

Share of Basic Material Stocks have Increased Within GGN’s Top Investments

A year back, GGN had a reported turnover of 96 percent, and now it has gone up to 126 percent. However, as discussed earlier, that happened primarily due to trading on call options. One year ago, 57 percent of its equity investments were in basic materials, that included gold, and the remaining 43 percent were in stocks from the energy sector. I expected most of the basic material stocks to generate strong positive returns, and thus enable GGN to sustain a double-digit yield. These stocks didn’t disappoint me as all those stocks generated positive price growth during the past twelve months. For obvious reasons, the fund managers of GAMCO Global Gold, Natural Resources & Income Trust increased their allocation in basic material stocks to 62 percent.

A year earlier, GGN’s top 60 percent portfolio included 12 mining companies like Newmont Corporation (NEM), Franco-Nevada Corp (FNV), Barrick Gold Corp (GOLD), etc. During the past twelve months, barring NEM and BTG, all other stocks generated positive price growth and half of them delivered double-digit price growth. The fund has kept all these stocks in its portfolio and further added stocks of SSR Mining Inc and a few others. This signifies this fund’s increased emphasis on gold and basic material stocks.

Number of Energy Stocks have Decreased within the GGN’s Top Investments

A year ago, GGN also invested significantly in most renowned energy stocks such as Chevron Corporation, Exxon Mobil Corp, and others. Half of those stocks (COP, BP, HAL, EOG, PXD and KMI) no longer count among the top 60 percent of GAMCO Global Gold, Natural Resources & Income Trust. As expected, most of the energy stocks failed to attain strong price growth this year, due to supply chain bottlenecks and availability of discounted Russian energy supplies. Only MPC, SLB and SHEL were able to record double-digit price rise during 2023. However, the price growth of most energy stocks is still on the positive side.

Investment Thesis

GAMCO Global Gold, Natural Resources & Income Trust invests in stocks of companies principally engaged in extracting and supplying gold, basic metals and energy resources. In addition to equity investments, GGN earns premium on writing call options on such equities. This enables this fund to offer strong payouts. It generated a close to double-digit trailing-12-month yield and a total return of almost 17.5 percent. This is almost 1.7 times of total return of S&P 500.

The fund is also available at a decent discount to its net asset value. GGN has delivered market-beating returns since the Covid-19 pandemic has jeopardized the overall market. Thus, under current market conditions, GGN becomes a highly lucrative option especially for income-seeking investors.

One year ago, positive impacts of increasing commodity prices were already reflected in price growth for energy and commodity stocks. However, gold mining and basic metal companies were yet to enjoy the fruits. Within the past one year, the price of basic metal stocks went up, while energy stocks failed to replicate their market-beating returns. One year later, I can observe that GGN has increased its allocation to stocks of gold mining and basic metal companies, and reduced its allocation in energy stocks. A number of energy stocks among its top 60 percent investments has been halved, while the number of gold and basic metal stocks have increased by 50 percent. This suggests that the asset managers have been able to rightly assess the market sentiments. All these factors makes me further hopeful regarding making fresh investments in GAMCO Global Gold, Natural Resources & Income Trust.

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