IHD - IHD: An Appealing Income Emerging Market Alternative

2023-07-18 13:44:39 ET

Summary

• Voya Emerging Markets High Dividend Equity Fund's core investment strategy revolves around targeting stocks with sustainable dividend characteristics.
• Performance analysis of IHD reveals a robust forward yield of 11.84%.
• Investing in the IHD closed-end fund offers several advantages.

Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip. - John Locke

Investing in the Voya Emerging Markets High Dividend Equity Fund (IHD) can be a promising strategy for those seeking a high yield investment in emerging markets as an alternative to iShares MSCI Emerging Markets ETF (EEM). As an actively managed closed-end fund, or CEF, IHD offers a unique blend of a quantitative stock selection process and a call writing option strategy, designed to optimize income. I very much believe emerging markets will be the next market leader, but as we wait for that to occur, it's not a bad idea to get paid with dividends.

Understanding IHD's Investment Strategy

IHD's core investment strategy revolves around targeting stocks with sustainable dividend characteristics. By overlaying a call writing option strategy on these stocks, the fund seeks to maximize income. This call writing strategy typically involves using broad exchange-traded funds, or ETFs, that target specific regions or countries, which represent 15% to 50% of the overall portfolio, based on market conditions.

The distribution policy of IHD is designed around a specific per share quarterly distribution. This distribution amount is determined based on the past and projected performance of the fund. As is common with many option writing strategies, the performance of the market heavily influences the distribution.

IHD's Performance

Performance analysis of IHD reveals a robust forward yield of 11.84%. When looking at the total return dynamics against EEM on a relative basis, we can see that the IHD to EEM ration has nicely outperformed since 2021.

IHD's Risk Factors

Like any investment opportunity, IHD comes with its share of risks. One of the more concerning aspects of the fund is its history of cutting the quarterly distribution. Since 2011, the fund has seen several cuts in its distribution. Over the years, the annualized distribution yield of the fund has seen volatility, with a notable spike in 2015 during a meltdown in emerging markets equities.

The potential of IHD lies in its ability to leverage high growth rates, compelling valuations, and higher yields in emerging markets. With a backdrop of a weaker dollar ( UUP ), these factors can combine to offer an attractive growth story. In an emerging markets bull run, IHD can offer significant advantages.

Comparing IHD with Other Funds

At a high level, IHD bears similarities to the iShares Core MSCI Emerging Markets ETF (IEMG), one of the largest emerging markets ETFs. Seven of IHD's top 10 holdings also feature in IEMG, making it a quasi-index fund with a twist of active management.

The Advantages of Investing in IHD

Investing in IHD offers several advantages. The fund's portfolio optimization process has demonstrated effective risk management, and the fund maintains a similar beta to that of IEMG. We can see from country weightings that, much like other popular emerging markets ETFs, a bet on IHD is largely a bet on China, which I suspect is due to stimulate its own economy soon given deflationary pressure post re-opening.

Conclusion

In conclusion, while IHD might have some performance struggles and multiple distribution cuts, the high yield options in the emerging markets space are limited. If emerging markets perform well in the latter half of 2023 thanks to the improving macro environment and a weaker dollar, IHD could potentially outperform. It's a fund worth considering for those bullish on emerging markets.

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