This article was originally published on December 17th, 2019.
Most U.S. investors don’t hold nearly enough exposure to international securities. This is where a fund like Voya Global Advantage and Premium Opportunity Fund (IGA) can come in to increase such exposure. Even better, the fund is trading at a steep discount and offers an attractive yield. It’s no secret that U.S. equities have really been outperforming their global counterparts in most recent years – but doesn’t necessarily mean one can forget about global equities completely.
In the chart below we can compare the last 11 years of performance between two ETFs that are representative of U.S. equities and global equities.
(Source – Yahoo Finance performance numbers, author compiled chart)
The above chart is looking at annual performance for the ETFs of Vanguard FTSE All-World ex-US ETF (VEU) and the SPDR S&P 500 ETF (SPY). This shows a comparison that in any year one can outperform the other. In most cases of the last 11 years, it would appear that SPY was the hands-down way to go. This can lead to a bias of neglecting global securities altogether. However, let’s consider an even longer-term big picture chart for a greater perspective.
(Source – bourbonfm.com)
In the above chart, we can clearly see there have been periods of international outperformance relative to domestic U.S. securities. It would also appear that we have been in an extended period of such U.S. outperformance. I’m not predicting that 2020 will be the year of the international comeback. I’m also not saying that I would be surprised if it was either. As I’ve mentioned before, I’m not one for market timing, but I do believe in diversification and picking up funds that are attractively valued.
IGA can be a perfect way to play a potential rebound in international securities. The fund announced a distribution cut with its September quarterly announcement. This sent shares lower to its longer-term historical discount range.
At the CEF/ETF Income Laboratory we hold IGA in our Income Generator portfolio.
About The Fund
IGA is a smaller sized fund at around $212 million in assets. The smaller size tends to lead to lower average trading volume, in this case, the fund shows around 68k average volume. A fund with lower trading volume would make a limit order a good idea.
The fund utilizes a call writing options strategy to “create a diversified portfolio with enhanced total return potential and strong downside capture over a full market cycle.” The fund operates with an investment objective of “a high level of income; capital appreciation is secondary.”
Regarding the fund’s call writing strategy, they will target “an amount equal to approximately 50-100% of the total underlying value of the portfolio.” The wide range can give management flexibility in just how defensive a posture they may want to maintain during any period of time. This could potentially lead to outperformance or underperformance relative to their peer funds that maintain a higher percentage to an options strategy at all times. As of their latest Fact Sheet, IGA had just under 50% of the portfolio’s value underwritten.
Similar to other funds that deploy an options strategy, we see lower expense ratios. IGA’s last reported expense ratio was 0.99%. A lower expense ratio can be positive. However, keep in mind that many other CEFs operate with leverage and leverage expenses can make a total expense ratio look quite large. Though the leverage utilized can significantly enhance potential returns (and losses.) IGA does not utilize any leverage.
Shares of IGA currently trade at $10.69 per share, with a NAV price of $11.65. This leads us to an attractive discount of 8.24%. Although, their last 1-year average discount is at 8.49%. This would give us a slightly positive 1-year z-score of 0.14. Taking a look even further back, at the fund’s 5-year historical range, we arrive at a discount of 8.29%. This puts the fund’s current discount at its historical range indicating that the fund isn’t necessarily cheap or expensively priced at the moment. However, I would argue that it is cheap considering the fact that we haven’t seen discounts reach much wider levels than this. If they were, it was only for shorter periods, excluding the GFC of 2008.
IGA has significant exposure to assets outside of the U.S. and has still been able to produce some attractive returns. On a longer-term basis, the fund has been able to outperform the global ETF mentioned above, VEU. Although, to be quite fair, the more recent returns have been closely similar. This is even while IGA does have a large chunk of U.S. names. The VEU ETF is completely ex-U.S. holdings. So, in theory, we should have seen such outperformance out of IGA – even recently, not just on a longer-term basis.
(Source – CEFConnect)
As previously mentioned, IGA announced a distribution cut several months ago when they announced their October quarterly payment in September. This wasn’t the only Voya fund to see a slash to their distribution rate, several others also followed suit with a steep decline the following day. IGA had actually gone from around a 6.6% discount to almost 9% the very next day. In fact, shares continued lower for several days and we hit a 10%+ discount at the beginning of October. We pulled the trigger at the Lab on IGA on October 31st, when shares were still at an over 9% discount.
The distribution rate had previously been $0.225 per share, this was then lowered to $0.197 per share or a 12.4% cut. This still works out to shares having a yield of 7.37% currently. The NAV yield sits at a manageable 6.76%. The fund last cut its distribution at the end of 2016. We would anticipate that the current rate is here to stay for a while.
(Source – CEFConnect)
When a CEF makes a distribution cut, the share price generally is painful to watch for current holders. We were fortunate not to hold shares before such an announcement, but we seized the opportunity to take advantage of said plunge following the cut. For those that did hold shares leading up to the announcement, we had previously discussed distribution cuts in a prior article.
(Source – IGA Semi-Annual Report)
Based on the numbers, it didn’t appear like IGA was out of the ordinary for an equity fund. The low NII coverage is expected, coming in at 38.5%. For an equity fund, we would anticipate that much of the distribution comes in the form of capital appreciation on the underlying portfolio.
(Source – IGA Semi-Annual Report)
When looking a bit more at their Semi Report we can see that the fund had very little left in “reserves” for tapping into unrealized appreciation. In fact, from their Annual Report, they had shown $19,125,117 in unrealized appreciation when they reported at the end of February. Two things could have happened here, the underlying assets depreciated or they turned these unrealized gains into realized gains.
(Source – IGA Annual Report)
Taking it even further, we can see that the fund had been paying out a significant portion of long-term capital gains for the prior two years. This also isn’t a huge red flag for an equity fund. However, it does appear that IGA made the decision that at the current rate it was unsustainable. ROC in an option fund isn’t necessarily always a bad thing, as we have seen with Eaton Vance funds. But, if it ends up being destructive ROC than we do see a problem with that eventually.
Consistent with their strategy of “investing in global securities,” the fund currently has 40% of its portfolio classified as outside of the U.S.
(Source – IGA Website)
One thing of interest to note here is that China does not appear as a top geographical weighting. This can either be viewed as a good or a bad thing. The U.S.-China trade war won’t necessarily have a greater impact on the fund with little exposure to China. However, there is still an impact on the global economy if we don’t see the signing of the phase one trade deal. Additionally, the fund may not experience the upside potential that Chinese exposure could bring should we see such a signing.
(Source – IGA Website)
Another interesting thing to note about the fund is that we see many of the top 10 holdings based out of the U.S. These are large multinationals that we generally see in U.S. equity-based funds. While it is normal to see such names appear, even in global funds, I would say that they generally aren’t as concentrated in the top 10 list.
The two holdings that are headquartered outside of the U.S. are Roche Holding AG (OTCQX:RHHBY) and Royal Dutch Shell PLC – Class A (RDS.A). These are still very large multinational companies. In fact, they derive a significant amount of revenue from right here in the U.S.
RHHBY trades OTC and is headquartered in Switzerland. The company operates in the healthcare space offering cancer treatments and many medications. RHHBY has a long history of dividends as well, which isn’t always typical with foreign companies. Although, a long history alone isn’t attractive. Where this company is the same as other foreign peers is the unattractive schedule of dividends and not regard for dividend growth.
(Source – Seeking Alpha)
RDS.A is another company that is well known in the U.S. We are constantly reminded of Shell and we don’t have to drive very far to see a Shell gas station. RDS is headquartered in the Netherlands and operates as a giant integrated oil and gas company. This oil behemoth actually reported the highest revenue of its integrated non-state owned oil peers too in 2018.
RDS does offer an attractive quarterly dividend, the company is currently yielding 6.43%. The company hasn’t focused on growing its dividend for a while, but at that current rate, we probably shouldn’t expect growth. The fact that the company has just mostly maintained, with very small increases over the last several years is a feat in itself.
(Source – Seeking Alpha)
IGA is a perfect way to gain international equity exposure with a well-known fund sponsor. It’s true, Eaton Vance also offers quite attractive funds in this space, the current valuation differences makes us favor IGA currently. The deep discount of 8.24% also puts the fund at its longer-term historical average, with investors not seeing too much deeper of a discount from current levels for extended periods of time. The fund may have just cut their distribution, but the newer rate should prove to be sustainable for the foreseeable future. It is also likely that the fund would have turned to destructive ROC should we not see strong performance in 2020 and beyond. For that reason, I believe it was prudent to take the necessary steps to avoid such erosion.
The other benefit of the distribution cut several months ago was for investors not currently in the fund to pick up some shares at an attractive valuation. Besides, the current distribution rate at 7.37% is quite attractive relatively speaking. Even better, should we see international securities reverse roles with U.S. equities in outperformance, this fund is poised to capitalize on that. From the charts at the beginning of this piece, we can see that U.S. performance has been terrific – but that doesn’t guarantee it will be that way forever!
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Disclosure: I am/we are long IGA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.