PEP - IGA: Returns Of This Strong-Yielding Global Equity CEF Seem Sustainable

Summary

• IGA generated a strong yield and has been able to achieve its objective of generating stable current income. The average annual total return also is quite high.
• IGA invests in stocks in ICT, financial, industrial, and healthcare sectors. These sectors in my view have maximum growth potential in the coming decade.
• Core healthcare and financial portfolio of IGA had a satisfactory performance during both the long run and immediate short run.
• IGA invests in developed equity markets that have relatively low growth but more stability and creditworthiness than emerging economies.

By Snehasish Chaudhuri, MBA (Finance)

Voya Global Advantage and Premium Opportunity Fund ( IGA ) is a closed-ended equity mutual fund ((CEF)) that invests in various equity markets spread all over the globe. It also invests through index call options on selected indices, equities, and/or exchange-traded funds (ETFs). The fund currently has investments in 241 stocks, and in a few swaps and other derivative instruments. Throughout the years, IGA generated strong yield and has been able to achieve its objective of generating stable current income. Average annual total return also is impressive.

IGA Has Been Able to Achieve its Prime Objective of Stable Current Income

Voya Global Advantage and Premium Opportunity Fund was launched by Voya Investment Management LLC. The fund is co-managed by NNIP Advisors B.V., Voya Investment Management Co. LLC, and Voya Investments, LLC. IGA has a relatively low asset under management ((AUM)) at $161 million. Expense ratio of this fund is a bit high at 1.1 percent. The fund uses MSCI World Index as its benchmark. This index tracks almost 250 equity stocks listed in the developed stock markets throughout the world. IGA at present has 241 holdings in its portfolio. The fund employs fundamental analysis and a proprietary discounted cash flow valuation model in order to create its portfolio with a bottom-up stock picking approach.

Voya Global Advantage and Premium Opportunity Fund was formed on July 7, 2005 as ING Global Advantage and Premium Opportunity Fund, and has been paying quarterly dividends on a consistent basis. Trailing-twelve-month ((TTM)) yield is almost 9 percent. Average annual yield recorded during the past ten years is more than 10 percent. So, the fund has been able to successfully achieve its primary investment objective of generating strong current income. Based on such strong yield, IGA recorded an annual average total return of 11.73 percent during 2017 and 2021. Though, total return in 2022 was negative 8.4 percent, it was much better than the broader market (S&P500) which recorded a negative return in excess of 18 percent.

Core Healthcare & Financial Portfolio of IGA Had a Satisfactory Performance

While analyzing a diversified equity fund, I always look for what percentage of its assets are invested in the equity stocks of companies belonging to four sectors - information & communication technology ((ICT)), financial, industrial and healthcare. In my opinion, these are the four sectors that will witness the maximum growth in the coming decade. Fortunately, these four sectors got the top four allocations in terms of IGA's investments, and accounts for little over 60 percent of its entire portfolio. In terms of regional distribution , US stocks account for almost two-third of its investments, while the remaining one-third has been invested in established and matured equity markets of Japan, Canada, Australia, Hong Kong and some Western European markets.

Although the fund has invested more than 21 percent in stocks of financial firms, no single stock accounts for even 0.9 percent of its total assets. Top investments in the financial sector are made in two relatively unusual names - Zurich Insurance Group AG ( ZURVY ), Marsh & McLennan Companies Inc ( MMC ) and MetLife, Inc. ( MET ). 7 out of IGA's top ten stakes are healthcare companies. Its major investments in healthcare includes pharmaceutical giants Johnson & Johnson ( JNJ ), Bristol-Myers Squibb Co. ( BMY ), Pfizer Inc. ( PFE ), and Merck & Co. Inc. ( MRK ); and biotechnology behemoths like AbbVie Inc. ( ABBV ), Amgen Inc. ( AMGN ), and Gilead Sciences Inc. ( GILD ).

All these stocks, including ZURVY and MMC, recorded positive price growth during the past five years, as well as during the past three months. This is despite the fact that the broader market had performed poorly in the past two years. During the past 3 months, barring BMY, all other stocks recorded a double-digit price growth. And during the past 5 years, barring JNJ, BMY, and GILD, all other stocks generated a price CAGR (compounded annual growth rate) in excess of 6.5 percent. So, the core healthcare and financial stock portfolio of Voya Global Advantage and Premium Opportunity Fund have performed well both in the long run and in the immediate short run.

IGA Performed Better Than S&P in 2022, Specially During the Last Quarter

Unfortunately, IGA recorded a price loss of almost 24 percent over the past 5 years. This resulted primarily due to poor performance of technology and energy stocks. Surprisingly, the top 20 investments include stocks of a good number of energy firms such as Chevron Corp. ( CVX ), Phillips 66 ( PSX ), Air Products and Chemicals Inc. ( APD ), Marathon Petroleum Corp. ( MPC ), and Duke Energy Corp. ( DUK ), although the fund has invested only 8.25 percent of its assets in energy stocks. Within the technology and industrial space IGA has invested heavily in Cisco Systems Inc ( CSCO ), AT&T Inc ( T ), Verizon Communications Inc. ( VZ ), and 3M Co. ( MMM ), Emerson Electric Co. ( EMR ).

During the past five years, only two of the above 10 stocks (APD & PMC) were able to generate a price CAGR in excess of 6.5 percent. However, during the past 3 months, all these stocks grew by more than 9 percent in terms of price. As its core healthcare and financial portfolio also registered a double-digit growth, overall price growth of IGA has also been quite high at 8.13 percent. Other top holdings of Voya Global Advantage and Premium Opportunity Fund such as Procter & Gamble Co. ( PG ), PepsiCo Inc. ( PEP ), and Philip Morris International Inc. ( PM ), also recorded growth in excess of 9 percent.

Testing My "7 Factor Model for Evaluating Global Equity Funds" on IGA

I find Voya Global Advantage and Premium Opportunity Fund to be lucrative according to my "7 Factor Model for Evaluating Global Equity Funds." It qualifies for the minimum requirements with respect to AUM, stock price, generated strong yield over the years and has been able to successfully achieve its objective of generating stable current income. IGA is trading around $9. It has a relatively low AUM, and is trading at a discount of 11.34 percent. The core healthcare and financial portfolio of IGA had a satisfactory performance during the past 5 years as well as the past three months. Due to its consistent high yield, average annual total return also is quite high.

Significant proportion of IGA's assets are invested in ICT, financial, industrial and healthcare sectors. These sectors in my view have maximum growth potentials in the coming decade. It invests only in developed equity markets that have relatively low growth, but has more stability and creditworthiness than the high-growth emerging economies. Due to all these, IGA seems to sustain its current level of yield, which is the critical success factor of this global equity fund. Its investment strategy is most likely to suit income seeking investors. However, growth seeking investors too can invest in this fund as average total return is quite impressive. In my opinion, Voya Global Advantage and Premium Opportunity Fund stands out as an attractive option.

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