ZTR - ZTR: A Fund That Just Returns Your Money

2023-08-03 11:37:26 ET

Summary

• Virtus Total Return Fund has a dividend yield of 15% but has underperformed with a total annual return of only 0.1% over two decades.
• The fund's income has consistently decreased, with dividend payments dropping from $2.16 to 96 cents per share annually.
• The fund's high leverage and dividend payments make it difficult for the fund to recover losses, and it has consistently traded at a discount.

Virtus Total Return Fund ( ZTR ) is a high-yielding fund that has a rich dividend yield of 15%. At first look the fund looks like it could be great for income seekers but upon a deeper look it is clear to me that the fund simply returns people's money to them without adding much value and it is difficult for me to recommend this fund to anyone at the moment.

The fund has been around for 2 decades (founded in 2005) but the fund's total return during this time is only 2.83% which is less than 0.1% annualized. We might as well call it zero. Meanwhile the fund's share price got demolished and is down -84% since inception. Keep in mind that much of this performance happened during one of the strongest bull markets in history (2009-2021).

Many times investors who put their money in funds that have super high dividend yields say that they don't care about capital appreciation and they are only in it for the income but this fund failed even on that aspect. Over the last two decades, the fund's income kept shrinking and shrinking. Originally the fund was paying $2.16 per share annually but now it's down to 96 cents per share, down 4.67% annually in the last 2 decades.

The fund currently invests in a basket of close to 600 assets including stocks, corporate bonds and government bonds. Most of the fund's stock holdings are in utilities, energy and real estate while most of the fund's bond holdings are in high-yielding corporate bonds.

The fund's top holdings include a lot of infrastructure and energy stocks. I would even consider some of these stocks as quality picks but this didn't stop the fund's underperformance over the years.

The funny thing is the fund underperformed almost all of its top holdings in the last 5 years in total returns. The biggest stocks held by the fund had total returns levels ranging from -8.51% to 160% with average being 40% while the fund's total return during this period was only 6.87%, vastly underperforming all but two of its biggest holdings.

One of the issues I see with this fund is high leverage. The fund currently borrows $207 million against its net assets of $464 million. This gives them a leverage ratio of 45% and "Effective Leverage" ratio of 31%. The fund divides its debt by total managed assets to calculate its effective leverage but this number is misleading because they should be using debt to net assets which gives you a higher number of 45%. Think of it like this. If you have a stock portfolio of $100k and you use margin to buy another $50k worth of stock, you are using 50% leverage but this fund's "Effective Leverage" calculation would put your leverage at 33% which doesn't reflect how high your actual leverage is.

When a fund uses such a high leverage, its losses are multiplied. On top of that, add the high dividend payments and it becomes very difficult for the fund to recuperate its losses. Let's put it in simple terms. Let's say a fund has $100 and it borrows another $50 to buy stocks and bonds. Now the fund has $150 purchasing power but it is 50% leveraged. The fund's holdings drop 30% in value and now the fund has only $100 left and it still owes $50. In addition the fund makes a $15 dividend payment. Now the fund has only $85 left and it still owes $50. The fund now has to almost double its money just to recuperate its losses and reach breakeven. This is not even adding the interest payments the fund has to keep making to keep its margin alive.

Even if the fund eventually reaches breakeven it will have to cut dividends to keep itself sustainable. It keeps going on and on for years and you have a fund that bleeds NAV year after year and its rich dividend payments of 15% don't even result in 1% in total return. In other words, the fund is slowly paying you your money back. As a matter of fact, if you add inflation and opportunity cost to the mix, you are losing a great deal of money over the years.

The fund currently trades at a discount of 7.47% against its NAV but this discount is nowhere enough to make up for the chronic underperformance of the fund. Not to mention, this fund almost always traded at a discount against its NAV and it rarely helped investors over the years so I don't really see much value in the current discount.

In addition, the fund also has an expense ratio of 1.60% which will diminish your returns even further. The reason it has such a high expense ratio is because the fund uses leverage and has to make interest payments. So not only is the fund's excessive usage of leverage resulting in huge losses for investors but they also have to pay for it in a higher expense ratio because using margin has interest costs.

I think investors would be far better off putting their money in an index fund. I know index funds don't yield much and you will be happy to get a yield around 1-3% per year depending on which index fund you pick but your total return will be much higher. Also most index funds will give you dividend growth over time whereas this fund will has only been cutting dividends over the years. In index funds you can always create your own dividends by either selling covered calls or selling a small number of stocks every year (2-3%) and you would still be far ahead of what you'd get from a fund like this.

In conclusion I'd recommend investors to stay away from this fund which mostly returns their money to them in ever-shrinking dividends while taking on too much risk by being overleveraged. You would do much better in an index fund in my opinion.

For further details see: