USA: A Very Attractive Fund For Income Investors With A 9.5% Yield

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Khanchit Khirisutchalual Introduction Liberty All-Star Equity Fund (NYSE:USA) is a closed-end fund incepted on Oct. 31, 1986. The fund primarily invests in common equity of large-cap stocks in the U.S...

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The fund primarily invests in common equity of large-cap stocks in the U.S...</p>\n\n<a href=\"https://seekingalpha.com/article/4680177-usa-a-very-attractive-fund-for-income-investors-with-a-9-5-percent-yield\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>USA: A Very Attractive Fund For Income Investors With A 9.5% Yield</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nUSA: A Very Attractive Fund For Income Investors With A 9.5% Yield\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-25 21:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4680177-usa-a-very-attractive-fund-for-income-investors-with-a-9-5-percent-yield><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Khanchit Khirisutchalual Introduction Liberty All-Star Equity Fund (NYSE:USA) is a closed-end fund incepted on Oct. 31, 1986. The fund primarily invests in common equity of large-cap stocks in the U.S...</p>\n\n<a href=\"https://seekingalpha.com/article/4680177-usa-a-very-attractive-fund-for-income-investors-with-a-9-5-percent-yield\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FT_SY_ES","symbol_name":"SP500指数","start_time":0,"source_url":"https://seekingalpha.com/article/4680177-usa-a-very-attractive-fund-for-income-investors-with-a-9-5-percent-yield","article_id":"2422128514","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1469387313/image_1469387313.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2422128514","pubTimestamp":1711371600,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Khanchit Khirisutchalual Introduction Liberty All-Star Equity Fund (NYSE:USA) is a closed-end fund incepted on Oct. 31, 1986. 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The fund primarily invests in common equity of large-cap stocks in the U.S. market, with an objective of earning total returns and current income in the form of capital gains and dividends. Nearly 90% of its assets are invested in the U.S. and North America, and the rest from the developed markets, including Europe, the U.K., Japan, and Australia. Its portfolio includes growth as well as value stocks, and with one single investment, it provides exposure to a diversified pool of core stocks from various industries that make up the U.S. economy. The fund provides a generous but fixed distribution policy based on the NAV in each quarter. As per the fund's literature, It is a multi-managed fund that allocates its portfolio assets on an approximately equal basis among several independent investment management organizations (currently five in number) having different investment styles recommended and monitored by ALPS Advisors, Inc., the Fund's investment advisor. The Fund's assets are approximately equally distributed among three value managers (Aristotle Capital Management, Fiduciary Management, and Pzena Investment Management) and two growth managers (Sustainable Growth Advisers and TCW Investment Management Company). Other salient features of this fund are as follows:  The fund employs near zero leverage, and as such, under normal circumstances, the fund has no interest expenses incurred. The fund has been in existence for a long time, since 1986. The fund invests in a diversified portfolio of equity securities. As per the mandate, it invests at least 80% of its assets in equity securities, and the rest could be in short-term money market instruments. However, the fund is over 95% invested in equity stocks. As of Dec.31, 2023, since Jan.1, 1988, the fund has returned 10.66% (annualized) on an NAV basis, compared to 10.79% for the S&P 500. These results assume that all distributions were reinvested. So, we can see that it closely mirrors the performance of the S&P 500 over a long period of time. The fund was incepted at the end of 1986 but it started a dividend policy starting Jan. 1988. The fund pays a quarterly distribution. It also follows a 'managed' distribution policy, which would mean that the fund may not always earn enough in investment income and capital gains and pay some of the distribution as ROC (return of capital). As a policy, it pays out the equivalent of 2.5% of NAV each quarter. It would mean that the fund pays less when the market is doing poorly but pays more in distribution when the market is doing better. The funds' mandate allows it to invest globally, but the majority of its assets are invested (nearly 90%) in the U.S. markets. It is a reasonably diversified fund and has a total of 146 holdings (as of Dec.31, 2023), and it is less concentrated in the top 10 holdings, as they accounted for only 22%. In comparison, the S&P 500 has nearly 29% of its assets in just the top 7 technology funds. As of Dec. 31, 2023, the fund under its management had roughly $1.87 billion in net assets. The fund is an actively managed fund, and as per the fund's literature, it has an expense ratio (including the management fee) of 0.93% on the net assets. The fund's net assets and total assets are nearly the same, as it does not use leverage. According to our calculations, its expenses came out to be 0.84% on the basis of year-end net assets. As of Mar. 21, 2024, its distribution yield on the market price was 9.65% and 9.45% on the NAV. As of Mar. 21, 2024, USA's market price offered a discount of -1.95% to its NAV, which is better than the 3-year average premium of +1.84%, but slightly worse off of the 6-month average discount of -2.93%.  Financial Outlook Let's look at the Fund's Financial health and performance. The fund has already released its 2023 annual report covering the past 12 months for the period of Jan. 2023 - Dec. 31. 2023. We will analyze the financial data in detail in Table-1, which is presented below. Net Investment Income: The net investment income (or NII in short) is the net income that a fund earns from its investment in the form of dividends, distributions, and interests or derivatives like options, minus all of the fund's expenses, including management fees, operating expenses, commissions, and interest on leverage, if any. For equity-based funds, especially in high-growth sectors like technology, the NII is not very relevant. However, for fixed-income or bond funds, it is highly relevant. In the case of USA fund, it is purely an equity fund. It uses no leverage, and many of its equity holdings pay no dividends or very little. For example, in 2023, it generated only $0.09 a share of investment income (before expenses), while the distributions were $0.61 a share. So, for the most part, the fund has to depend on short-term and long-term capital gains. Here is what it looks like in terms of NII, Distributions, and Net Assets at the beginning and end of the statement period. (all amounts are in US $ (except Shares Outstanding); negative amounts are shown inside parentheses, per the annual report, 12-months ending Dec. 31, 2023). Table-1: Author Data source: USA's 2023 12-Month Annual-report Distributions The fund follows a 'managed' distribution policy. 'USA' currently provides a quarterly distribution of $0.17 per share, which comes out to be a yield of 9.71% at current prices and 9.52% on the NAV as of 03/20/2024. However, the distribution amount can change frequently from quarter to quarter based on the NAV price. The fund has a policy to distribute 2.5% of the quarter NAV, thus distributing roughly 10% of the NAV on an annual basis. So, that means, in a down market, it will distribute less, while in a bull market, when NAV should have appreciated, it will distribute more. That kind of makes sense and should benefit the long-term investors. That said, 10% appears to be quite aggressive and does not leave much for the growth of the original capital. So, it is up to the investor to reinvest some of the distribution back into the fund to have some capital growth. So, is the distribution covered? Table-2: Distribution (from 2020-2023) Author (Data source: Fund's website) Please note that the above table takes the distributions based on the tax year, and the dividend declared in November each year will be counted in the next year (for tax purposes, as it is payable in January). So, the amount may not match the distribution expense shown in the annual report exactly. The fund does not generate a substantial amount of investment income. For example, in 2023, it generated only about $0.09 per share, while $0.05 was spent on expenses, leaving only 4 cents a share. Since the fund does not use any leverage, it does not have any interest expenses. With very little investment income, it has to rely upon capital gains. During a down market, it may have to pay some of the distribution in the form of ROC (Return of Capital), as we can see that the fund paid roughly 12% as ROC over a period of four years, but mostly in the year 2022. As long as we do not have a prolonged bear market, the fund should do fine, and there should be no destructive ROC. The fund has to depend on good years to generate enough capital gains to sustain the current level of distributions. As long as the down cycles are not prolonged multi-years, this fund should do just fine. Discount/Premium The fund is currently trading at a very small discount of -2% (to its NAV), which is roughly in the same range as its one-year average. Below is the history of premium/discount for the last five years. The fund frequently goes from premium to discount and vice-versa. But it has mostly stayed in a range between +5% premium to -5% discount. Currently, there is a discount but not much, and it can change from day to day. However, discount/premium is not the only factor that we should look at. We should also look at the fund's overall valuation. Chart-1: USA- Premium/Discount Chart (five-year period) CEFConnect Fund Holdings The fund is fairly diverse in terms of the number of holdings, which stood at 146 as of Dec. 31, 2023. Also, it is not too concentrated in the top 10 holdings as they accounted for only 22%. The top 20 holdings accounted for 33.5% of the fund's assets. The top 20 holdings as of Dec. 31, 2023, and sector allocations are presented below. Some of the top holdings are Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), UnitedHealth (UNH), NVIDIA (NVDA), Visa (V), ServiceNow (NOW), S&P Global (SPGI), Charles Schwab (SCHW), and Capital One (COF). We can see that some of the top holdings are similar to the S&P 500, but they vary in terms of allocation/concentration. The S&P 500 has much higher exposure to the 'magnificent seven' stocks, roughly at 29%, while 'USA' is only at about 11%. Table-3: (Top 20 Holdings as of Dec. 31, 2023) Source: Fund's Annual Report Table-3B: Sector diversification Source: Fund's Annual Report Performance and Valuation First, we will present three charts from the fund's documents that provide a fair idea of the performance, both short and long-term. The fund is quite old (nearly 37 years) and has seen both good and bad periods. The fund tries to provide the likely capital appreciation in the form of distributions, with its policy to distribute 2.5% of the NAV each quarter (nearly 10% on an annual basis). This is also the long-term total returns from the broader market over a very long period. Chart-2: Source: Fund's Annual Report In the chart above, if you assume that you never invested in the rights offerings but reinvested all distributions, the CAGR (Cumulative Annual Growth Rate) comes to 10.66% (compared to 10.79% from the S&P 500). This is quite good considering that the fund also paid roughly a 0.90% fee for the active management. However, the short-term performance would vary based on which period you are looking at. Also, the proper benchmark for the fund is Lipper Large-cap Core and not the S&P 500. The short- and mid-term comparison is provided in the table below. Chart-2B: Source: Fund's Annual Report Chart-2C: Source: Fund's Annual Report We are going to compare a few of the similar funds on performance metrics. These funds are:  (USA) - Liberty All-Star Equity Fund (GAB) - Gabelli Equity Trust   (GAM) - General American Investors (EGOAX) Allspring Large Cap Core (mutual fund) (FLCSX) Fidelity Large Cap Stock (mutual fund) (SPY) - S&P 500 ETF  Table 4: Comparison of 6 funds Author Note: Some of the data (e.g., number of holdings and leverage) may not be current. Return calculations were done using Portfolio Visualizer. What about the future performance? In the last two to three years, we have had high inflation and a high interest rate regime. However, due to rate cut expectations, the stock market, in general, has been touching new highs. Since Jan. 2023, the S&P 500, as well as 'USA' have gained nearly 30%. Also, we have a small discount of nearly -2%, but not much to speak of. Risk Factors Investors need to be aware of certain risk factors that are associated with this fund and CEFs in general. Risk factors could be summarized as follows:  USA fund is classified as \"Large-Cap Core.\" It generally mirrors the performance of large-cap core stocks minus the fund's expenses. So, in general, the performance of the fund is tied to the U.S. economy and its markets. USA fund does not employ any leverage, so it is not directly impacted by the movement of interest rates in the U.S. However, the companies in which it is invested are impacted by the same. So, the future performance would be impacted by the direction and movement of interest rates. The interest rates seem to have peaked this cycle and are likely to come down from here. However, there is no certainty as to when and at what pace they would come down. The fund is subject to general stock market risk. This means that if the broader stock market were to decline, that would adversely impact the performance of this fund as well. The general risks such as the geo-political situation. We cannot rule out the possibility of a recession in the U.S. in 2024. If a recession were to occur and turn out to be deeper than expected, the majority of its holdings would suffer and decline in value.  Concluding Thoughts If you are young and retirement is many decades away, there is no need for income. There is not much purpose in investing in a closed-end fund that is, at best, going to match or replicate the performance of the S&P 500. However, if you are an income investor, nearing retirement, or already a retiree, 'USA' can be a very interesting and reliable fund. In one single investment, you get exposure to the entire U.S. large-cap stocks, including both growth and value stocks. For a fee of 0.90%, the fund managers do the selection, portfolio management, periodic balancing, decide when to capture capital gains and pay regular distributions set on a fixed norm (fixed % of NAV). The fund's policy of distributing less when the markets are down and more when the markets are booming works well in the long run. However, we feel the fund distributes too much (as 10% of NAV annually), and thus, there is little scope left for capital appreciation. However, as an individual investor, you could reinvest (at least a quarter) of the distribution back in the fund to enable it to compound.  The new buyers should acquire in multiple stages using the dollar-cost-average. If they invest a fixed amount every time, they buy more shares when the price is down but fewer shares when the price is high. The existing owners should hold the shares for the long term and reinvest at least part of the distribution amount.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":2,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422128514"}