IGD - IGD: International Equity CEF 9% Yield

2023-04-21 10:30:29 ET

Summary

• Voya Global Equity Dividend and Premium Opportunity Fund is an equity closed end fund.
• The CEF invests in global equities that have attractive dividends and is overweight U.S. companies at 64% of the portfolio.
• The fund has a very low standard deviation of 11% and a high Sharpe ratio (i.e. a good risk/reward profile).
• The CEF had a very shallow drawdown in 2022 and is currently trading with a discount to NAV of over -13%.

Thesis

Voya Global Equity Dividend and Premium Opportunity Fund ( IGD ) is an equity closed end fund. The fund invests in global equities that have attractive dividends, and has the ability to sell call options on its holdings as well.

The vehicle has a robust historical performance, and does a good job of transforming global equity returns into current yields. When compared to an ETF peer, namely the S&P Global Dividend ETF ( WDIV ), the fund matches its performance long term, and has actually managed to outperform its vanilla peer in the past year.

Furthermore IGD is trading with a low historic standard deviation of 11% and a high Sharpe ratio of 0.91. The CEF is well set-up from an analytics stand-point, and is currently unleveraged. The yield is currently unsupported, given the poor recent performance in global equity markets, but that is to be expected. Most equity CEFs are currently using a high amount of ROC due to that occurrence.

What is interesting about this fund is its correlation to the macro environment from a discount perspective. We saw the CEF move to a large discount during the Covid melt-down and then gradually recover. Something similar happened in the beginning of 2022 here, with the fund staying at a large discount. Do not expect this vehicle to move with each bear market rally from a discount perspective, but do expect a nice 10% bump-up when the next cyclical bull starts. We like this aspect because it is predictable.

Given where we are in the cycle an investor can start keeping an eye on this name and start buying on dips. The fund is less volatile than other equity peers, and has proven fairly defensive in the past year, with a shallow drawdown of only -11% in 2022.

Analytics

• AUM: $0.4 bil.
• Sharpe Ratio: 0.91 (3Y).
• Std. Deviation: 11% (3Y).
• Yield: 9%
• Premium/Discount to NAV: -13.4%
• Z-Stat: -2.14
• Leverage Ratio: 0%
• Composition: Global Dividend Stocks
• Duration: n/a

Performance

The fund has done very well in the past year, when compared to the Vanguard Total World Stock ETF ( VT ) and the S&P Global Dividend ETF:

The chart is utilizing the total return function in order to normalize returns among uneven financial instruments such as CEFs and ETFs. We expect good CEFs to match an equivalent ETF performance, while really good funds outperform.

Longer term, the CEF's performance matches that of the world dividend ETF, which is encouraging:

Premium/Discount to NAV

This CEF has a very high beta to risk-on / risk-off environments from a macro standpoint:

We noted above from 'a macro standpoint' because the correlation is linked to the economic cycle rather than each bear market rally. We can note the deep discount during the 2020 Covid melt-down, followed by a consistently narrow discount during the market rally. Since the initial leg down in this bear market in 2022, the fund has moved towards the wide end of the discount range.

Expect this to persist this year and to get a nice 10% bump-up in returns during the next structural bull market.

Holdings

The fund only holds equities, and the United States is the main jurisdiction represented:

From a sectoral standpoint, financials have the highest weighting, followed by health care:

And from an individual name perspective, we can find the top 10 populated with large multinationals:

Sources of Distribution

Here is where the issue lies with equity CEFs - they need to distribute even when they do not have any money to do so:

IGD estimates that for the current fiscal year as of March 31, 2023, approximately 35% of each distribution is characterized as net investment income and 65% is characterized as return of capital.

This is to be expected given the negative market performance in the past year. However constant utilization of ROC will result in a lower NAV by definition (you are getting your money back, hence the pool of cash is diminishing). That results in a lower positive leg up during the next bull cycle. To that end many pure equity long positions are more honest from that perspective when compared to CEFs, which have to distribute.

Conclusion

Voya Global Equity Dividend and Premium Opportunity Fund is an equity closed end fund. The fund invests in global equities that have attractive dividends, and has the ability to sell call options on its holdings as well. The vehicle is more of a defensive play given its low standard deviation of 11%, which translated into a very shallow drawdown in 2022. When benchmarked against a vanilla ETF in the global equity dividend space, the CEF comes out a winner. The fund does what it is supposed to do - namely transform global dividend equity returns into monthly cash dividends, which are currently around 9%. Given the underperformance in global stocks in the past year, the CEF is currently using a high amount of ROC to support that dividend. Do not expect explosive growth in this fund during the next bull market, but do expect a nice 10% bump-up from its discount to NAV, which is highly correlated to macro cycles.

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