Summary
- Virtus AllianzGI Dividend Interest & Premium Strategy Fund invests substantially in the ICT, Financials, and Healthcare sectors and is expected to generate strong growth in the coming decade.
- NFJ has generated strong yield and total return over the long run. It is currently trading at a significant discount.
- NFJ’s strategy of investing in dividend-paying stocks and writing call options is expected to sustain the current level of yield.
Virtus AllianzGI Dividend Interest & Premium Strategy Fund (NFJ) is a closed ended equity mutual fund ("CEF") that invests in dividend-paying stocks, mostly of U.S.-based companies. The fund employs a combination of fundamental analysis (with a bottom-up stock picking approach) and quantitative analysis in order to create its portfolio. NFJ also employs covered call strategies, and the premium earned is used to generate a strong payout. The fund generated high yield and delivered strong annual average returns between 2016 and 2021. It is trading at a discount of almost 14 percent, which makes this high-yielding covered call CEF attractive.
Virtus AllianzGI Dividend Interest & Premium Strategy Fund is a Hybrid CEF
Virtus AllianzGI Dividend Interest & Premium Strategy Fund was formed on February 28, 2005 as NFJ Dividend, Interest & Premium Strategy Fund. It was launched and managed by Allianz Global Investors Fund Management LLC. This CEF is co-managed by Allianz Global Investors U.S. LLC and NFJ Investment Group LLC. NFJ Investment Group LLC is a global value equity manager with a rich heritage and deep roots in Dallas, Texas, dating to 1989. NFJ seeks capital growth and income by investing in large-cap and mid-cap companies at the intersection of value, quality, and shareholder yield.
Virtus AllianzGI Dividend Interest & Premium Strategy Fund invests in a diversified portfolio of convertible securities, income-producing equity stocks, American depositary receipts ("ADRs"), income-producing debt and other instruments of varying maturities. For the convertible portion, the fund primarily invests in income-producing synthetic convertible securities, and may include below-investment grade convertible securities. The fund also employs an option strategy in which it writes or sells call options on equity securities held in this Fund. Option premiums received through writing those options enhance the distributable amounts for its existing shareholders.
Virtus AllianzGI Dividend Interest & Premium Strategy Fund benchmarks itself against Russell 1000 Value TR. It is currently trading at $11.2, at a significant discount to its net asset value ("NAV") of $13.14. The fund has a high expense ratio of 0.96 percent. It pays quarterly dividends and generates an annual average yield mostly between 7 to 10 percent. Average yield during the past 10 years stood at 9.6 percent. With the help of big data and data analytics NFJ effectively discovers undervalued or properly valued stocks. NFJ in its website claims that it seeks to identify companies with low market expectations and best ever prospects of returning value to its shareholders.
NFJ has Made Strong Bets on ICT, Financials, and Healthcare Sectors
Virtus AllianzGI Dividend Interest & Premium Strategy Fund has an asset under management ("AUM") of $1.32 billion. More than 60 percent of its equity investments are in three sectors - Information & Communication Technology ("ICT"), Financials, and Healthcare. In my opinion, these are the sectors that will generate the maximum growth in the coming decade. If the fund is able to pick up the high dividend-paying stocks among the above-mentioned sectors, NFJ will be a perfect fund to deliver strong returns for both income seeking investors and growth seeking investors. Historically, this fund has delivered high overall growth. During the period between 2016 and 2021, it generated an annual average total return of 13.75 percent.
Top investments of Virtus AllianzGI Dividend Interest & Premium Strategy Fund includes mostly stocks from ICT and financial sector. It has invested in most sought after technology stocks like Adobe Inc (NASDAQ: ADBE ), Microsoft Corp (NASDAQ: MSFT ), Apple Inc (NASDAQ: AAPL ), Lam Research Corporation (NASDAQ: LRCX ), Verizon Communications Inc (NYSE: VZ ), Celanese Corp (NYSE: CE ), Meta Platforms, Inc. (NASDAQ: META ), NVIDIA Corporation (NASDAQ: NVDA ), KLA Corp (NASDAQ: KLAC ), and Agilent Technologies Inc (NYSE: A ). In the Financial Sector the fund has invested in JPMorgan Chase & Co (NYSE: JPM ), BlackRock Liquidity FedFund Institutional Shares Inst (Mutual Fund: TFDXX ), Citigroup Inc (NYSE: C ), Bank of America Corporation (NYSE: BAC ), and TransUnion (NYSE: TRU ). Together, these 15 securities account for almost one-third of the entire portfolio.
The performance of its top holdings delivered a mixed performance during the past 5 years. Half of these stocks - KLAC, NVDA, AAPL, MSFT, LRCX, A, ADBE - delivered strong growth in between 14 TO 28 percent CAGR. The other half - JPM, BAC, TRU, CE, VZ, META, C - delivered low or negative price growth. However, one important fact to note is that all these 14 stocks had negative price growth during this year. Value of most of these stocks fell in excess of 27 percent. As a result, the price of Virtus AllianzGI Dividend Interest & Premium Strategy Fund fell by 31 percent during this year.
NFJ's Fixed Income Portfolio has a Very Poor Credit Rating
Almost 80 percent of NFJ's fixed income portfolio is unrated. Another 5 percent of the fixed income portfolio has below investment grade rating. These securities have a weighted average maturity of 3.85 years. Again, a little less than 60 percent of its fixed income investments are in those three sectors - ICT, Financials, and Healthcare. The kind of credit rating this portfolio has, will make any investor quite skeptical about the sustainability of its yield. Fortunately, the fixed income portion of NFJ's portfolio is very low, almost negligible. The overall risk of Virtus AllianzGI Dividend Interest & Premium Strategy Fund is quite low as represented by a beta of 0.97 and standard deviation of 20.13. Standard deviation of the index stands at 20.17.
Investment Thesis
Virtus AllianzGI Dividend Interest & Premium Strategy Fund is geographically non-diversified, but invests in all sectors of the economy. More than 60 percent of its equity investments are made in ICT, Financials, and Healthcare sectors. In my opinion, these are the sectors that will generate the maximum growth in the coming decade. Its top investments in the financial and ICT sector have delivered mixed results over the past 5 years. However, the performance in 2022 has been poor, and that resulted in negative price growth over the past 5 years. But, the good thing is that if we keep aside the returns of this year, the fund has performed quite well. During the period between 2016 and 2021, it generated an annual average total return of 13.75 percent.
Virtus AllianzGI Dividend Interest & Premium Strategy Fund is currently trading at a significant discount, which makes this fund attractive. It pays quarterly dividends and generates an annual average yield mostly between 7 to 10 percent. Thus, investors of this fund are very much dependent on the sustainability of its yield. As NFJ invests in high dividend-paying stocks and employs covered call strategies, I am hopeful about generating a strong yield. Even at the time, the fund performed poorly in the stock market, it has been consistent with its yield. We should also remember that the return in the broader market, too, was very poor during this year.
Thus, if we analyze Virtus AllianzGI Dividend Interest & Premium Strategy Fund over a longer time period, NFJ passes most criteria set out by my "7 Factor Model for Analyzing a Fund" - stock price, AUM, average yield, level of portfolio diversification, average risk of portfolio, discount to its NAV and sustainability of its yield. Thus, I am optimistic about this covered call CEF.
For further details see:
NFJ: High-Yielding Covered Call CEF Poised For High Growth In Long Term