URTH - IGD: An Option-Income CEF Trading At A Huge Discount (Rating Downgrade)

2023-12-29 11:38:25 ET

Summary

• The Voya Global Equity Dividend and Premium Opportunity Fund specializes in providing investors with a high level of current income.
• The IGD closed-end fund's recent performance has been disappointing, with shares down 4.21% since the last article was published.
• The fund employs a strategy of selling call options to generate income, but its distribution has been decreasing over time.
• The fund currently yields 9.58%, but it requires the market to retain its current strength to sustain it. This may not be the case.
• The fund is trading at an enormous discount on net asset value.

The Voya Global Equity Dividend and Premium Opportunity Fund ( IGD ) is a closed-end fund, or CEF, that specializes in providing investors with a very high level of current income. Income is something that we can all use right now, as inflation continues to track along at levels much higher than we have become accustomed to over the past thirty years or so. In fact, contrary to government statistics, necessities such as food are going up in price quite rapidly.

Anecdotally, I have personally noticed an increase in my grocery bills over the past few months despite no change in my shopping habits. It is, therefore, quite easy to understand why more income is very nice to achieve today. The Voya Global Equity Dividend and Premium Opportunity Fund does reasonably well at providing its investors with a high level of income, as is immediately evident with its 9.58% current yield. This is a higher yield than many other equity closed-end funds possess.

As regular readers might remember, we last discussed the Voya Global Equity Dividend and Premium Opportunity Fund in the middle of November 2022. The fund’s performance since that time has left a lot to be desired. As we can see here, shares of the fund are down 4.21% since the date that the previous article was published. This is much worse than the S&P 500 Index ( SP500 ) has delivered over the same period:

That seems likely to be something of a turn-off for potential investors, despite the fact that the Voya Global Equity Dividend and Premium Opportunity Fund has a significantly higher yield than the S&P 500 Index. However, it is also important to keep in mind that the fund’s distributions provide a source of investment return. As such, the performance that is realized by investors is going to be significantly better than the share price performance alone would indicate. When we include the distributions that the fund paid out, investors in the fund actually realized a 6.05% total return since the last article on it was published. This is still worse than the broader market index managed to deliver over the period but at least it is positive:

This is still a bit disappointing since investors could have done much better by investing in a good floating-rate fund or a junk bond fund. However, bonds do not have as much upside potential as common stocks over the long term, so we still want to include equity exposure in our portfolios. This fund does that, but as we will see in this article, it does represent something of a trade-off between yield and upside potential. Thus, this fund is more targeted at investors who want a very high level of income rather than ones whose only objective is to get the highest possible return that they can.

About The Fund

According to the fund’s website , the Voya Global Dividend and Premium Opportunity Fund has the stated objective of providing its investors with a very high level of current income. This is a very unusual objective for a common equity closed-end fund. According to CEF Connect, the fund currently has 96.09% of its assets invested in common equities alongside a small cash position:

This is in line with the website’s statement that:

[The fund] invests in global common stocks with a history of attractive dividend yields.

Investing in dividend-paying stocks is a common strategy for income-focused investors, but it has not really been a great strategy for anyone who is seeking income for most of the 21st century. This is because the yield on common stocks has been incredibly low. For example, the current yield of the S&P 500 Index ( SPY ) is 1.39% and the yield of the MSCI World Index ( URTH ) is 1.69%. This is mostly because the incredibly low-interest rates and substantial amount of money-printing that has been seen all around the globe over the last two decades has driven up equity valuations and driven down yields. It is still possible to obtain respectable yields by investing in certain traditional energy companies, tobacco firms, and a few other things but for the most part income-focused investors have been better off sticking to leveraged fixed-income strategies.

The Voya Global Equity Dividend and Premium Opportunity Fund employs a somewhat different strategy to obtain a very high yield from a common stock portfolio. As the website explains:

[The fund] sells call options on selected indices and/or on individual securities and/or ETFs to seek gains and lower volatility of total returns over a market cycle.

The fund is then utilizing an options-income like the Madison Covered Call & Equity Strategy Fund ( MCN ) or some of Eaton Vance’s option-income funds. As I explained in a recent article , this strategy can effectively convert a portfolio of ordinary common equities into a portfolio of very high-yielding companies. It is possible to earn a synthetic dividend yield of 1% or so per month, depending on how much of the upside potential the fund is willing to sacrifice and how much of its portfolio it is willing to overwrite. The website does not state what percentage of the portfolio is overwritten, but the fact sheet provides some information:

It appears that the fund’s portfolio is currently about 47% overwritten, which is lower than the level that some of Eaton Vance’s option-income funds maintain. As of the time of writing, the fact sheet for the Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund ( ETW ) states that it has options written against 95% of the value of its stock portfolio. Thus, the Voya Global Equity Dividend and Premium Opportunity Fund is somewhat less aggressive about writing options than some other options. This has both advantages and disadvantages. The disadvantage is the fund’s income from the option premiums will be somewhat lower than the Eaton Vance fund. At the same time, the fund’s upside potential from common stock appreciation could be higher because it has a higher percentage of the portfolio that is not covered by options. This is something that could be appealing to those investors who expect that the market will continue its recent bull run.

The performance comparison of these two funds shows mixed results, however. The Voya Global Equity Dividend and Premium Opportunity Fund has delivered a higher total return than the Eaton Vance fund over the past five years:

However, the Eaton Vance fund managed to outperform the Voya Global Equity Dividend and Premium Opportunity Fund over the trailing ten-year period:

Naturally, past performance is no guarantee of future results. Thus, we cannot necessarily draw any conclusions from these results. However, it appears that the strategy of the Eaton Vance fund could work better in ultra-low interest rate environments. As we can see, the Eaton Vance substantially outperformed through 2021 but lost its footing in 2022 when the Voya Global Equity Dividend and Premium Opportunity Fund was a much stronger performer as central banks all over the world began to raise their interest rates and pulled out the rug from technology and other high-duration stocks. As I have pointed out in various previous articles, Eaton Vance funds tend to be very heavily invested in the “Magnificent 7” stocks. The Voya fund is a bit more diversified than this.

As mentioned earlier, the website of the Voya Global Equity Dividend and Premium Opportunity Fund states that it invests its assets primarily in dividend-paying stocks from all over the world. We certainly see this by looking at the largest positions in the fund. Here they are:

Here are the current dividend yields paid by these companies:

Unlike many other funds that claim to invest in dividend-paying stocks and then include companies like Alphabet ( GOOG ), Meta Platforms ( META ), and Amazon.com ( AMZN ) in their largest positions, this one obviously actually is investing in dividend-paying stocks. All of the above companies have higher yields than the S&P 500 Index as a whole. This helps to compensate for the fact that the fund is not as overwritten as some similar offerings from other fund managers. After all, the fact that these stocks have substantially higher yields than the index and higher yields than many of the technology stocks that we typically find among the largest positions in other funds results in this fund earning a higher percentage of its total investment income from dividends than peer funds.

On the website, the fund specifically states that it invests in companies from all around the world. The name of the fund suggests the same thing. However, we do not really see this by looking at the largest positions in the fund’s portfolio. The only foreign company on the largest positions list is Philip Morris International, and that one might be arguable. After all, some sources state that Philip Morris International is an American company that conducts its business overseas despite the company being headquartered in Switzerland.

The fact that so many of the companies on the fund’s largest positions list are American firms might lead some readers to conclude that the fund is heavily exposed to the United States. This is correct, as currently 65.63% of the fund’s assets are invested in American equities:

The United States accounts for a little less than a quarter of the global gross domestic product, so the fund is obviously overweight to this country based on its actual representation in the global economy. However, the United States does currently account for 69.74% of the MSCI World Index so the Voya Global Equity Dividend and Premium Opportunity Fund is slightly underweight to the United States based on its representation in the index. This is unfortunate, as it does mean that this fund will not be especially effective at reducing the overexposure that most American investors have to their home country. As such, it would be a good idea to also hold a fund that includes appropriate international exposure to ensure that your assets are protected against regime risk or any other single-country problems that might happen in the future.

Distribution Analysis

As mentioned earlier in this article, the primary objective of the Voya Global Equity Dividend and Premium Opportunity Fund is to provide its investors with a very high level of current income. In order to achieve this objective, the fund invests in a portfolio of dividend-paying common equities issued by companies all over the world. As we can see from the chart above, many of these equities have higher yields than the major indices so they provide a respectable level of income to the fund, albeit not as much as fixed-income securities might. The fund also writes call options against the major indices or individual stocks that it holds, with the goal of receiving a premium from the option sale and then keeping that premium when the option expires. This strategy alone is capable of providing a very high synthetic yield from the portfolio and when combined with the dividend income that the fund receives from the dividend stocks that it holds, we can clearly see that it should be earning a very high effective yield. The fund pools all of this money together and then pays it out to the shareholders net of its own expenses. We can probably assume that this strategy will result in the fund’s shares having a very high effective yield.

This assumption is correct, as the Voya Global Equity Dividend and Premium Opportunity Fund pays a monthly distribution of $0.04 per share ($0.48 per share annually), which gives the fund a 9.58% yield at the current price. This is a very reasonable yield considering that this fund is investing in common equities, as there are not many common equity or option-income closed-end funds that match this yield. Unfortunately, the fund has not been especially consistent with respect to its distribution over the years. As we can see here, the Voya Global Equity Dividend and Premium Opportunity Fund has generally decreased its distribution over its lifetime:

This will almost certainly prove to be a turn-off for those investors who are seeking a safe and consistent income that they can use to pay their bills or finance their lifestyles. It also has a worse track record than some of Eaton Vance’s comparable funds, which could improve the appeal of those funds at the expense of this one in the eyes of some readers. The fact that the fund’s distribution has been gradually declining over time is also not something that we want to see in today’s inflationary environment. After all, as I mentioned in the introduction, the cost of everything that we buy in the store has been going up, so we need our incomes to be increasing in order to maintain our lifestyles. This fund’s track record points to a declining income over time unless some of the distributions are reinvested in shares of the fund.

As I have pointed out numerous times in the past though, anyone who purchases the fund today will receive the current distribution at the current yield. As such, the fund’s history is not necessarily the most important thing to a buyer today. After all, today’s buyer will not be adversely affected by the actions that the fund has had to take in the past. The most important thing today is how well the fund can sustain its current distribution. Let us investigate this.

Fortunately, we have a very recent document that we can consult for the purpose of our analysis. As of the time of writing, the fund’s most recent financial report corresponds to the six-month period that ended on August 31, 2023. This is one of the newest financial reports that has been released by any closed-end fund and it is, naturally, much more recent than the one that we had available to us the last time that we discussed this fund. As such, it should be able to give us a good idea of how well the fund navigated the market strength that was prevalent during the first half of 2023. As you may recall, investors at that time expected that the Federal Reserve would pivot in September 2023 and cut interest rates, so they were bidding up the price of most assets in anticipation of this event. While that optimism proved to be misguided, it still could have presented the fund with some opportunities to earn a profit. This report will also give us a good idea of how well the fund managed to protect the value of its portfolio during the months of July and August, which were characterized by a bear market.

During the six-month period, the Voya Global Equity Dividend and Premium Opportunity Fund received $9,907,346 in dividends along with $25,994 in interest from the assets in its portfolio. When we combine this with a small amount of income from other sources, we see that the fund had a total investment income of $9,934,892 over the six-month period. The fund paid its expenses out of this amount, which left it with $7,702,911 available for shareholders.

This was, unfortunately, nowhere near enough to cover the distributions that the fund paid out over the period. The Voya Global Equity Dividend and Premium Opportunity Fund paid out a total of $19,078,951 in distributions to its investors. At first glance, this is likely to be concerning, as the fund clearly did not have sufficient net investment income to cover its distributions.

However, there are other methods through which the fund can obtain the money that it requires to cover the distributions. For example, it might have been able to realize some capital gains by selling appreciated stocks during the first half of 2023 when the market was quite strong. The fund also writes call options in order to earn premium income. Neither realized capital gains nor premium income are considered to be investment income for tax or accounting purposes, but they clearly represent money coming into the fund that can be paid out to the investors.

Unfortunately, the fund generally failed at this task during the period. The Voya Global Equity Dividend and Premium Opportunity Fund reported net realized gains of $1,972,481 but these were entirely offset by $1,979,666 net unrealized losses. Overall, the fund’s net assets declined by $13,096,216 after accounting for all inflows and outflows during the period. This is quite concerning, as it appears that the fund struggled to sustain its distribution over the period. This was the same situation that the fund had during the full-year period that ended on February 28, 2023:

Thus, the fund failed to cover its distributions over the trailing eighteen-month period. This is a bad sign, as the fund will probably end up having to cut the payout if it cannot fix this situation.

Fortunately, it does appear that the fund may have had some success in correcting this problem since the closing date of this report. This chart shows the fund’s net asset value per share since September 1, 2023:

As we can see, the fund’s net asset value per share has gone up very slightly since the closing date of its most recent report. This strongly suggests that the fund has generated sufficient investment returns to cover all of the distributions that it has paid since the closing date of the most recent financial report. If it can maintain this performance, then everything should be just fine with respect to its ability to maintain the current payout.

However, there is no guarantee that this will be the case since there are signs that the Federal Reserve will not deliver the rate cuts that are currently being demanded by the market. If that proves to be the case, then the market will almost certainly correct and hand some gains to the fund that apply some downward pressure on its net asset value.

Valuation

As of December 27, 2023 (the most recent date for which data is currently available), the Voya Global Equity Dividend and Premium Opportunity Fund has a net asset value of $5.83 per share but the shares currently trade for $4.99 each. This gives the fund’s shares a 14.41% discount on net asset value at the current share price. This is an incredibly large discount, and it is slightly better than the 13.91% discount that the fund’s shares have had on average over the past month. As such, the current price appears to represent a decent entry point if you wish to add the fund’s shares to your portfolio.

Conclusion

In conclusion, the Voya Global Equity Dividend and Premium Opportunity Fund is an interesting option-income fund that can be employed by investors who are looking to receive a very high level of income from their assets without sacrificing some of the upside that accompanies an equity investment. The fund has a very different portfolio from some of the similar funds that are available on the market, which could be useful for anyone who wishes to protect themselves against concentration risk.

Unfortunately, Voya Global Equity Dividend and Premium Opportunity Fund may not be able to sustain its distribution if the market corrects or the current friendly environment fades. The fund does trade at a very attractive price, though, so some of the risks do seem to be priced in right now.

For further details see: