IGD: Improved Finances, But Share Price Has Gotten Substantially More Expensive

seekingalpha08-12

Voya Global Equity Dividend and Premium Opportunity Fund offers a high current income with a 10.91% yield, appealing to income-focused investors.The fund has been significantly outperforming the S&P ...

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Yuji Sakai The Voya Global Equity Dividend and Premium Opportunity Fund (NYSE:IGD) is a closed-end fund that aims to provide its investors with a very high level of current income. Thus, it should at least be considered as an option for any income-focused investor, especially because its 10.91% current yield is fairly attractive relative to its peers:   Fund Name Morningstar Classification Current Yield   Voya Global Equity Dividend and Premium Opportunity Fund Equity-Covered-Call Funds 10.91%   BlackRock Enhanced Global Dividend Trust (BOE) Equity-Covered-Call Funds 6.99%   Eaton Vance Enhanced Equity Income Fund (EOI) Equity-Covered-Call Funds 8.52%   First Trust Enhanced Equity Income Fund (FFA) Equity-Covered-Call Funds 7.34%   Madison Covered Call and Equity Strategy Fund (MCN) Equity-Covered-Call Funds 9.99%   Click to enlarge As we can see, the Voya Global Equity Dividend and Premium Opportunity Fund has a significantly higher distribution yield than any of its peers. This is something that will undoubtedly appeal to any investor who is looking to maximize the income that they receive from the assets in their portfolios. However, as I have pointed out before, an outsized yield relative to a fund’s peers is frequently a signal that the market doubts the fund’s ability to sustain its distribution. Indeed, I pointed this out in my previous article on the fund, in which I showed that the fund has failed to cover its distribution for two straight years and has been destroying its net asset value in the process. However, this fund did recently increase its distribution, which is a sign that management believes that its financial fortunes have improved. We will want to take a close look at its portfolio performance today to determine whether or not this is the case. As just mentioned, we previously discussed the Voya Global Equity Dividend and Premium Opportunity Fund in mid-May of this year. The global equity market since that time has generally been fairly strong, although the market has started to turn over the past week or so. However, we can still assume that the fund has probably delivered a fairly positive performance since that time. This is indeed the case, as shares of the Voya Global Equity Dividend and Premium Opportunity Fund have risen by 6.80% since our previous discussion. This is significantly better than the 2.35% gain of the S&P 500 Index (SP500) over the same period: Seeking Alpha It is somewhat surprising that a covered call-writing fund would outperform the index over any multi-month period due to the nature of the strategy used by these funds. As I have mentioned in various previous articles, covered call strategies typically underperform the market when equities are rising. However, there are two things to consider here. The first is that the distribution increase in May might have played a role here since closed-end funds usually increase in price when they raise their distribution. In addition, the covered call strategy typically outperforms when the market declines. This is due to the premium income offsetting some of the decline in stock prices. It is possible that investors started bidding up shares of this fund when they became concerned about a potential market decline. As we can see the shares of this fund started appreciating right before the S&P 500 Index peaked in mid-July. However, the Voya Global Equity Dividend and Premium Opportunity Fund actually outperformed the market by even more than this chart suggests. As I stated in the previous article on this fund: A simple look at a closed-end fund’s price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. When we include the distributions that were paid out by the fund over the period in question, we get this alternative chart: Seeking Alpha This clearly shows us that over the past three months, investors in the Voya Global Equity Dividend and Premium Opportunity Fund have benefited from a 9.88% total return. This represents a substantial outperformance relative to the S&P 500 Index. This performance will almost certainly appeal to any investor who is trying to maximize their income. In fact, this will almost certainly appeal to any investor regardless of their goals. After all, we all like to outperform the market indices. However, it is important to keep in mind that the long-term performance of the Voya Global Equity Dividend and Premium Opportunity Fund has not been nearly as attractive. The fund has substantially underperformed the index over the past five years: Seeking Alpha This chart considers the impact of the fund’s distributions and even then, it underperformed the index by a significant margin. This does fit pretty well with my earlier statement about covered call funds underperforming during bull markets. However, with that said, there have been a number of reports in the financial media and emerging from various Wall Street analysts that suggest that the United States economy may be on the cusp of a recession. If that is the case, we may be in the early stages of a bear market. A fund such as this one could perform a bit better than the index during such a period. This could change our thesis surrounding this fund, and as such it is important to discuss today. Let us investigate. About The Fund According to the fund’s website, the Voya Global Equity Dividend and Premium Opportunity Fund has the primary objective of providing its investors with a high level of current income. This makes a certain amount of sense given the fund’s strategy. The website provides three bullet points describing the strategy:   Voya This is not exactly an unusual strategy for an equity income fund. Indeed, many equity funds that aim to provide income for their investors do something similar. The basic goal here is to purchase common stocks that provide the fund with an income simply by paying dividends. The fund writes call options against the stocks in its portfolio, which results in it receiving premiums from the sale. The hope is that the options will expire worthlessly, or in a worst-case scenario the fund will have to sell some of the stocks that it already owns to the option buyer upon exercise. This is generally a pretty safe strategy due to the fact that the potential losses from the option positions are limited. The worst that can happen is that the option-seller is forced to sell the securities that they already own. The selling price is also known in advance because of the strike price of the option. Thus, there is no risk that the option-seller will need to go out and buy the securities (potentially having to pay a very high price) in order to satisfy the demands of the option buyer. However, this fund is not entirely doing a covered call strategy. The statement from the website specifically states: Sells call options on selected indices and/or on individual securities and/or ETFs to seek gains and lower volatility of total returns over a market cycle. There is no way to own an index. This is the reason why index options are typically cash-settled. It is possible to own exchange-traded funds tracking an index, but these do not perfectly track indices. For example, consider the following chart: Seeking Alpha This chart shows the performance of the S&P 500 Index and three of the most popular S&P 500 Index exchange-traded funds over the past five years. The S&P 500 Index rose 83.11% over the period, but all three indices underperformed it:   Exchange-Traded Fund Price Return   SPDR S&P 500 ETF Trust (SPY) 82.77%   iShares Core S&P 500 ETF (IVV) 82.91%   Vanguard S&P 500 ETF (VOO) 82.97%   Click to enlarge The biggest reason for this is that all of these index funds have an expense ratio, albeit a small one. The index fund sponsor is charging a fee to the fund, which acts as a slight drag on its performance. This is important because it means that a strategy consisting of purchasing an index fund and then writing an index option does not result in perfect coverage. The index fund will always slightly underperform the index itself, so the option-writer could still lose money. This is a risk for the Voya Global Equity Dividend and Premium Opportunity Fund. In any case, this fund is not trying to cover its index option positions with exchange-traded index funds. According to the fund’s first quarter 2024 holdings report, the Voya Global Equity Dividend and Premium Opportunity Fund had the following short call option positions as of May 31, 2024: IGD Q1 2025 Holdings Report We see here short options in The Consumer Staples Select Sector SPDR Fund ETF (XLP), The Financial Select Sector SPDR Fund ETF (XLF), the FTSE 100 Index, The Health Care Select Sector SPDR Fund ETF (XLV), The Industrial Select Sector SPDR Fund ETF (XLI), and the Nikkei 225 Index. The FTSE 100 and the Nikkei 225 positions are both index options, but all the rest are simply call options against an index exchange-traded fund. Thus, in order to fully cover all of those positions, all that the fund would need to do is purchase the exchange-traded funds. However, the Voya Global Equity Dividend and Premium Opportunity Fund has not done that. The only index exchange-traded funds that it was holding as of May 31, 2024, were the iShares MSCI EAFE Value ETF (EFV) and the iShares Russell 1000 Value ETF (IWD). Thus, the fund is not actually holding any of the assets against which it has written call options. Therefore, this fund is writing naked call options, which is a far more dangerous strategy than covered call-writing because the potential losses could be unlimited. The Voya Global Equity Dividend and Premium Opportunity Fund is therefore not nearly as safe as funds such as the Madison Covered Call & Equity Fund, which do actually fully cover all of their short option positions with the asset itself. The fund’s first-quarter 2024 provides the following asset allocation as of May 31, 2024:   Asset Type % of Net Assets   Common Stock 96.6%   Exchange-Traded Funds 1.4%   Money Market Fund 1.0%   Click to enlarge Eagle-eyed readers might point out that these figures only total 99.0%, so there are roughly 1.0% of the fund’s net assets unaccounted for. It is possible that rounding may account for some of this discrepancy, but the fund’s holding report does state that it has 1.0% of its net assets held as “Assets in Excess of Other Liabilities.” It does not state where this money actually is, but it does outright state that it is needed to fully account for all the fund’s net assets. Thus, the discrepancy is not fully explained by rounding. One possible explanation for the discrepancy could come from the fact that the fund is writing naked call options. In some cases, an investor or fund writing these securities will need to post collateral as a guarantee that the option will be honored if the market moves against the writer. It is thus possible that the 1.0% of net assets that are unaccounted for are simply being held by some third party as collateral against the short option positions. By this time, everyone reading this is likely well aware that much of the market turbulence over the past week was caused by the Bank of Japan raising its benchmark interest rate and causing one of the biggest carry trades in history to unwind. This caused the Nikkei 225 Index to plunge, and the index is currently down 16.44% over the past thirty days: Seeking Alpha Generally speaking, call option writers profit when the asset against which their call option was written declines. As such, this almost certainly worked out well for the Voya Global Equity Dividend and Premium Opportunity Fund if it renewed its Nikkei 225 call option short position when the previous one expired in mid-July. However, the previous position may not have worked out so well for the fund. Over the period from May 12, 2024 (the publication date of my previous article on this fund) until July 12, 2024 (the expiration date of the Nikkei 225 short option), the Nikkei 225 Index outperformed the S&P 500 Index: Seeking Alpha As we can see, the Nikkei 225 Index delivered an 8.04% gain over that period. The Nikkei 225 option had an exercise price of 38,872.780 JPY but the Nikkei 225 Index closed at 41,190.68 JPY on July 12, 2024, which was not its peak price during the period. Thus, the fund almost certainly took a loss on this short call option position regardless of whether it let it expire or repurchased it prior to expiration. The fund may have been able to earn back its losses if it entered into a similar position following the expiration of that option, but there is no guarantee that it did that. In any case, the above scenario clearly shows how volatility can negatively impact a fund that is writing naked options. Distribution Analysis In the previous article on this fund, I showed that the Voya Global Equity Dividend and Premium Opportunity Fund failed to cover its distributions over the two most recent fiscal years. From that article:  The fund thus failed to cover all the distributions that paid out for a second year in a row. For the full-year period that ended on February 28, 2023, the fund’s net asset value decreased by $36,881,097 after accounting for all inflows and outflows. While it is true that during both years the fund spent money repurchasing its own shares, it still failed to cover its distribution without that outflow. The annual report states that 61.44% of the fund’s distributions in the most recent fiscal year were return of capital.  Despite the fund’s inability to cover the previous distribution payments for two years in a row, it hiked its distribution in May. If the fund’s portfolio performance fails to cover this distribution, then it could result in an even more rapid destruction of the fund’s equity capital. The fund’s most recent fiscal year ended on February 29, 2024. This chart shows its net asset value since that time: Barchart This is disappointing, to say the least. As we can clearly see, the fund has so far failed to cover its distributions in the current fiscal year and, indeed, its net asset value was depleted as a result. The fund raised its distribution in May, so here is its net asset value since that time: Seeking Alpha The fund’s net asset value has increased by 0.68% since April 30, 2024. This suggests that it has, at least so far, managed to fully cover the higher distribution with a small amount of money left over. However, the fund has only made three distributions (May, June, and July) at the raised level, so it has not really been fully tested yet. It therefore remains to be seen whether or not the fund will be able to sustain its distribution, especially if the United States does ultimately fall into a recession. We should keep a very close eye on it for this reason. Valuation Shares of the Voya Global Equity Dividend and Premium Opportunity Fund are currently trading at a 6.30% discount on net asset value. This is quite a bit more than the 7.11% discount that the shares have had on average over the past month. It is also substantially more expensive than the double-digit discount that the shares had the last time that we discussed this fund. As such, it might be possible to obtain a better price by waiting a bit. However, the shares are still trading at a discount on net asset value, so the current price is not horrible for anyone who wishes to buy in. Conclusion In conclusion, the Voya Global Equity Dividend and Premium Opportunity Fund is an interesting closed-end fund that investors can employ to obtain both equity exposure and a high level of income. It is important, however, that we keep in mind that this fund is somewhat riskier than it appears as it is mostly writing naked calls against indices. This may have caused it to take some losses from its bets on Japanese equities over the past few months.  The fund’s finances have improved slightly since the last time that we discussed it, as it has managed to cover its newly raised distribution. However, the fund’s net asset value has not appreciated anywhere near as much as its share price, so it is currently more expensive than it was previously. It is still at a discount, though, but it is much narrower than it used to be. Therefore, anyone buying the fund today has a bit less protection against a market decline and may wish to be cautious.","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":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"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/2458386089"}