IDE - IDE: Another Shrinking NAV / Shrinking Income Fund
2023-03-13 23:50:24 ET
Summary
- The IDE has an interesting concept of potentially benefiting from the global need to revitalize critical infrastructure.
- Unfortunately, investment performance has been poor, with 5Yr average annual returns of only 1.1%.
- IDE's 9.6% yield appears to be simply the fund returning investors' own capital.
- I would avoid this shrinking NAV/income fund.
The Voya Infrastructure, Industrials and Materials Fund ( IDE ) has an interesting concept, trying to capitalize on the need to revitalize critical infrastructure across the world.
Unfortunately, performance for the fund has been poor, with 5-Yr average annual returns of only 1.1%. Although the fund's 9.6% yield is attractive, I think investors should avoid this fund as the yield is simply returning investors' own capital to them. Long-term investors in IDE have seen steep declines in both principal and income.
Fund Overview
The Voya Infrastructure, Industrials and Materials Fund is a closed-end fund ("CEF") that seeks to provide high current income and capital appreciation from investments in infrastructure, industrials, and materials sectors.
The IDE fund seeks to benefit from the growing need to revitalize critical infrastructure and invests in companies that may benefit from spending in power, construction, materials, communications, transportation, and water.
The IDE fund may write call options on ETFs to generate additional income for the portfolio.
The IDE fund has $177 million in assets and charged a 1.22% net expense ratio in fiscal 2022.
Portfolio Holdings
Figure 1 shows the country weights and sector weights for the IDE fund. Approximately half of the portfolio is invested in North America (47% U.S., 5% Canada), with the rest scattered across the globe.
Figure 1 - IDE sector allocation (voya.com)
The top sector weights in the fund are Electric Utilities at 6.6%, Industrial Conglomerates at 6.3%, Industrial Machinery at 5.7%, Telecommunication Services at 5.3%, and Multi-Utilities at 4.0%.
Returns
Figure 2 shows the historical performance of the IDE fund. The IDE fund has delivered generally modest returns, with 1/3/5/10Yr average annual returns of -2.5%/6.6%/1.1%/3.9% respectively to February 28, 2023.
Figure 2 - IDE historical returns (morningstar.com)
Distribution & Yield
The IDE fund pays a generous $0.229 / share quarterly distribution that annualizes to a 9.6% forward yield. On NAV, the fund is yielding 8.2%.
Although the yield appears attractive, investors should note that the IDE fund has historically not 'earned' its distribution, with 3 and 5Yr average annual returns of only 6.6% and 1.1% respectively. Historically, a large percentage of the quarterly distribution has been funded by return of capital ("ROC") (Figure 3).
Figure 3 - IDE distribution has been largely funded from ROC (IDE 2022 semi-annual report)
Funds that do not earn their distributions are called 'return of principal' funds and are characterized by long-term amortizing NAV. Since inception, IDE's NAV has declined by over 40%, from ~$20 / share in 2010 to ~$11 / share recently (Figure 4).
Figure 4 - IDE has a long-term amortizing NAV (morningstar.com)
Furthermore, long-term investors in IDE have seen their annual distributions shrink, from $1.80 when the fund was first incepted to $0.916 /share since 2020 (Figure 5).
Figure 5 - IDE's distribution has shrunk since inception (Seeking Alpha)
Since market price tracks NAV, long-term investors will have suffered a reduction in both their principal and income.
IDE Trades At Significant Discount To NAV
The only positive thing about the IDE fund that I can say is that the fund is currently trading at a 14.5% discount to NAV (Figure 6).
Figure 6 - IDE trades at a steep discount to NAV (cefconnect.com)
For funds that trade at significant discounts to NAV, a distribution with a high ROC component could be one way to unlock the NAV discount. However, I believe IDE's discount is simply a reflection of the funds' poor investment performance.
Conclusion
The Voya Infrastructure, Industrials and Materials Fund has an interesting concept, trying to capitalize on the need to revitalize critical infrastructure across the globe. Unfortunately, performance for the fund has been poor, with 5-Yr average annual returns of only 1.1%. Although the fund is paying an attractive 9.6% market yield, investors are simply getting their own principal returned through the distribution, as the IDE fund does not 'earn' its distribution. Long-term investors in IDE would have seen declines in both their principal and income. I recommend avoiding this fund.
For further details see:
IDE: Another Shrinking NAV / Shrinking Income Fund