Summary
- Despite successfully achieving its primary objective of generating high current income, $20 invested in Wells Fargo Advantage Global Dividend Opportunity Fund during 2007 currently has a value of less than $5.
- Erosion of net assets value and availing an annual return of 2.4 percent in 2007’s investment value is not something any investor would wish for.
- Overall, price performance of top investments held in EOD’s portfolio are not good enough, despite the fact EOD invests in potentially high-growth sectors.
~ by Snehasish Chaudhuri, MBA (Finance).
Wells Fargo Advantage Global Dividend Opportunity Fund ( EOD ) is a closed-end balanced mutual fund ("CEF") that primarily invests in high dividend paying stocks of companies operating across diversified sectors with an emphasis on technology and financial stocks. A little less than 20 percent of its assets are invested in fixed income securities. The fund also employs leverage to enhance returns and sells call options on the equity stocks that it is holding in its portfolio. EOD generates double-digit yield and its total return is strong enough during the long run.
However, I suspect that a part of EOD’s pay-out has been created out of its net assets. The very fact has been reflected in the price performance and erosion of NAV of this fund. The fund is currently trading at $4.9, at par with its NAV. It also has a very high expense ratio of 1.86 percent.
EOD Has Been Able To Successfully Generate High Current Income For Years
Wells Fargo Advantage Global Dividend Opportunity Fund has been paying quarterly dividends for the past 15 years. Its primary investment objective is to seek a high level of current income, and it is quite successful in that. The fund generates a double-digit yield, which itself is good enough to attract investors. EOD generated a yield of 10.75 percent during 2022, and an annual average yield of 10.625 percent during the past 10 years. Price growth, though minimal, is positive over the long run. Annual average total return generated during 2016 and 2021 was almost 12.6 percent. The only question here is the sustainability of this yield. It has seldom been observed that funds generate high yield out of erosion of its net asset value, as payout is created partially out of its capital.
EOD Has A Globally Diversified Balanced Portfolio Investing In The Right Sectors
Wells Fargo Advantage Global Dividend Opportunity Fund launched and managed by Wells Fargo Funds Management, LLC. It is co-managed by Wells Capital Management Incorporated and Crow Point Partners, LLC. The Fund allocates approximately 80 percent of its assets under management ("AUM") of $212.4 million to an equity sleeve composed primarily of common stocks and other equity securities that has the potential to offer above-average dividend pay-outs. This sleeve invests approximately between 60 to 80 securities, broadly diversified among major sectors and regions. Two-third of its assets are invested in large-cap stocks. Remaining 20 percent of its investable asset is allocated to a sleeve consisting of below investment grade, high-yield debt, loans, and preferred stocks.
Wells Fargo Advantage Global Dividend Opportunity Fund provides exposure to dividend growing companies with quality and growth characteristics, belonging to some targeted international markets. Almost 44 percent of assets are invested in the U.S. equity market. Outside the U.S., the fund invests primarily in equity markets of the United Kingdom, France, Netherlands, Germany, China, Japan, Brazil, South Korea, Indonesia, Canada, Hong Kong and Singapore. Most of these economies have growth potentials with relatively lower risks. Almost 35 percent of EOD’s net assets are invested in equity markets outside the U.S.
Despite Investing In High-Growth Sectors, EOD’s Portfolio Has Failed To Perform
Almost 72.5 percent of EOD's assets are invested in equities from four sectors - healthcare, financial, industrial, and information & communication technology (ICT). Major holdings from the financial, and ICT sectors included Microsoft Corporation ( MSFT ), Apple Inc. ( AAPL ), Visa Inc. ( V ), AXA SA ( AXAHY ), AT&T Inc. ( T ), Ares Capital ( ARCC ), 3i Group plc ( TGOPF ), Broadcom Inc. ( AVGO ), BB Seguridade Participacoes S.A. ( BBSEY ), Postal Savings Bank Of China Co., Ltd. ( PSTVY ), Bank of America Corporation ( BAC ), and BNP Paribas SA ( BNPQF ). During the past one year, barring BBSEY, all other stocks failed to generate price growth in excess of 9 percent. So, the ICT and financial portfolio of Wells Fargo Advantage Global Dividend Opportunity Fund had a very poor past 12 months.
Over the past 5 years, although technology-oriented stocks like MSFT, AAPL, AVGO, and V generated strong price growth, no other stock was able to generate a price growth in excess of 9 percent CAGR. Among the healthcare and industrial stocks, significant investments were made in Costco Wholesale Corp ( COST ), UnitedHealth Group Inc ( UNH ), Bristol-Myers Squibb Co ( BMY ), Hillenbrand Inc ( HI ), Schneider Electric SE ( SU ), nVent Electric PLC ( NVT ), and Gilead Sciences Inc ( GILD ). EOD also has significant investment in a money market fund named Allspring Government Money Market Fund Inst ( GVIXX ). While COST, UNH and NVT generated price growth higher than 9 percent CAGR over the past 5 years, prices of GOLD, NVT and SU grew in excess of 9 percent over the past 1 year. So, overall, price performance of top investments is not good enough, despite the fact EOD invests in potentially high-growth sectors.
Part Of EOD’s Payout Seems To Be Created Out Of Erosion Of Its Net Assets
Wells Fargo Advantage Global Dividend Opportunity Fund was formed during March 2007 with an asset under management of $365 million. NAV per share at that point was close to $20, and the fund paid a quarterly dividend of $0.5 for the first 10 quarters. Payout was first slashed to $0.28 during Q3, 2009, and has gradually come down to $0.12 at present. As discussed earlier, net assets at present are $212.4 million, which implies an erosion of 42 percent over the past 15 years. This suggests that part of the payout has been created out of EOD’s net assets. The very fact has been reflected in the price performance of this fund. An investor investing approximately $20 in EOD’s stock during 2007 may have enjoyed annual payout ranging between $0.48 and $2, but at present his principal investment has come down to a level below $5. That means, by investing $20 in 2007, an investor is getting a return of $0.48, i.e., 2.4 percent.
Investment Thesis
Erosion of net assets value and availing an annual return of 2.4 percent in 2007’s investment value is not something any investor would have wished for. So, despite successfully achieving its primary objective of generating high current income, this stock fails to generate enough attraction. Wells Fargo Advantage Global Dividend Opportunity Fund generates double-digit yield and its total return is strong enough during the long run. But all these come at the cost of erosion of its Net asset value. As NAV gets reduced over the years, the price of this fund also declines, and thus this double-digit yield looks attractive.
But this Wells Fargo Advantage Global Dividend Opportunity Fund policy is not sustainable over the long run. After a certain point of time, there will be not enough assets left to be invested and thus generate a high payout. And as the principal value of investments gets wiped off, investors will be in total loss.
Wells Fargo Advantage Global Dividend Opportunity Fund’s high expense ratio also does not help its investors. Moreover, EOD’s price hardly has moved up, which denies its existing investors to sell their investments so that they can be happy enjoying the current yields. Thus, despite its double-digit yields generated on a consistent basis, I am not very hopeful about Wells Fargo Advantage Global Dividend Opportunity Fund.
For further details see:
EOD: Double-Digit Yield Of This Globally Diversified CEF Seems Unsustainable