IGA: A Value In A Stretched Market

Summary

• IGA is a fund that writes index call options.
• They are invested in more value-oriented sectors and globally, which hindered their past performance.
• Going forward, could be a different story as value gets a lift, and the global focus of the fund could also benefit.
• Looking for a portfolio of ideas like this one? Members of CEF/ETF Income Laboratory get exclusive access to our model portfolio. Learn More »

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Written by Nick Ackerman, co-produced by Stanford Chemist

With Voya Global Advantage and Premium Opportunity Fund's (NYSE:IGA) tender offer finishing up recently, investors were given another opportunity to add this fund to their portfolio. IGA experienced the typical post-tender drop that is typical with these sorts of deals. This happens as there is no longer a catalyst to keep the fund at a more narrow discount than when they announced the deal. Investors can take advantage of this generally by participating in the tender with their full position - then buying back after the dip. In a way, it generates "free shares" as you can often buy more due to the dip than you originally had.

Over the longer term, IGA has indeed underperformed. However, looking forward the prospects for the fund are a bit brighter. The biggest reasoning for relative underperformance is typically due to the value-oriented portfolio. That being said, they are a very active fund switching in and out of sector allocations and positions regularly.

Additionally, the global focus of the fund had also hindered the fund's performance. If you are more optimistic on either of these areas of the market going forward, then IGA is definitely a fund worth checking out. The 8%+ discount certainly doesn't hurt either at this time. Making it even more of a value.

IGA's investment objective is "a high level of income; capital appreciation is secondary." They intend to write "call options on indexes or ETFs on an amount of equal to approximately 50-100% of the value of the Fund's common stock holdings." They had previously reported this on a Fact Sheet; however, this doesn't appear to be available at this time. Typically, this is an important metric to look at. This can help gauge how bullish or bearish the fund may be leaning.

The more overwritten the portfolio, then the more that would indicate they are bearish. As they would not want to be overwritten to a significant degree if they felt like the indexes were going to continue significantly higher.

The fund is a bit on the small end with only $175 million in total managed assets. Of course, this was reduced with the tender offer they just went through as well. The fund last reported an expense ratio of 0.97%.

(Source)

Performance - Large Discount

As touched on, the fund is focused on more value-oriented sectors. This includes financials as the highest allocation and industrials as the third largest allocation. The fund's focus on global assets was also a damper on the fund's historical returns. It isn't that the fund didn't return anything at all. It was just that most of the other call writing funds we cover performed quite a bit better. The past performance was better due to the heavier allocation to tech typically and focus on U.S. investments.

(Source - Fund Website)

That being said, it isn't the only fund focused on global positions. Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW) and BlackRock Enhanced Global Dividend Trust (BOE) both invest globally as well. ETW is another index writing option fund whereas BOE writes calls on its underlying portfolio. In the underlying chart, we can see that IGA came in around the middle of these two funds. BOE isn't as overweight in tech as its peers either.

On a shorter-term basis, such as the YTD chart below, we can see once again IGA comes in about the middle on a NAV basis. However, BOE is now leading instead of ETW. ETW is more focused on tech and since value started to outperform most of this year, it has done a bit better. With the economy set to continue growing and interest rates set to rise - I believe there is a good chance that funds such as BOE and IGA can continue to outperform.

Data by YCharts

What we can also see from the above chart is how the share price of IGA has performed worse than the others. This has widened the fund's discount relative to these peers. Despite that, on a YTD basis the fund has still been narrowing its discount too - just not as much so.

Over the longer term, the fund has rarely traded at premiums. You would have to go back to 2013 when the fund briefly touched premiums. Interestingly though, between 2009 and 2011 the fund enjoyed trading mostly at premiums the whole time. That was despite them cutting their distribution during that time too.

(Source - CEFConnect)

Distribution - Appealing 8%+ Yield

Currently, the fund pays a quarterly distribution at a rate of $0.1970. This works out to an 8.09% distribution yield - on a NAV basis this comes to 7.42%. Given the current environment, I would suspect this is sustainable for now. However, they aren't shy about cutting their distribution when need be. Unfortunately, due to the way the fund was invested, it has meant continual distribution cuts since its inception.

(Source - CEFConnect)

That isn't just IGA either. ETW and BOE also have a similar distribution trend for the same reason. So even two of my favorite sponsors; BlackRock and Eaton Vance weren't immune. A good reminder that a CEF is primarily what it owns. Since these funds focused on global investments, they were at a disadvantage historically.

Data by YCharts

In terms of distribution coverage, as an equity fund, we will see appreciation do most of the heavy lifting. They will rely on capital gains to fund a large portion of their distribution. During some down years, it will even include a return of capital. In the case of IGA, last year's ROC was destructive.

(Source - Annual Report)

For the distribution tax classifications, we see some differences from the actual earnings of the fund. This is also typical and it is why looking at the actual tax classifications is important if held in a taxable account.

(Source - Annual Report)

Holdings - Overweight Financials

Overall, I'd say this fund is fairly diversified. The overweight allocation to financials should be beneficial when interest rates get raised in a couple of years. However, it isn't overwhelmingly invested in financials, in my opinion. As other sectors still make up a fairly meaningful allocation. As the economy continues to grow, industrials should also be set to outperform.

(Source - Fund Website)

The fund is globally focused but still shares a large allocation to U.S. positions at nearly 64% of the portfolio. Once again, this is fairly standard of even "global" focused funds. They all carry quite a bit of weight to U.S.-based investments. Though it still leaves a large enough portion of the portfolio outside of the U.S., that it could benefit from a potentially increased performance from international securities.

(Source - Fund Website)

The fund is overwhelmingly invested in equity securities. It comes to 97.21% of the portfolio. The fund last reported 74% portfolio turnover, so they are also quite active. In fact, in 2020 they reported 130% portfolio turnover. That could help explain the significant difference we saw in net investment income (NII) from year-over-year. As the portfolio is constantly evolving, so too will its earnings. What this also means is that the fund's sectors can change frequently. Just last year they were overweight tech when we last covered the fund.

That being said, the fund's top 10 holdings are fairly attractive U.S.-based investments. Though several of them are multinational so they are doing business outside the U.S. as well. Technically, meaning they could have more global exposure than initially shown.

(Source - Fund Website)

Amongst the top holdings, I hold several positions myself directly. These are mostly large-cap dividend growers such as; Verizon Communications (VZ), Merck & Co. (MRK), AbbVie (ABBV) and Texas Instruments Inc. (TXN). Besides finding the fund's top holdings quite appealing - it also can provide plenty of diversification for CEF investors. These positions aren't seen in too many other funds. Instead, a lot of funds are chock-full of the mega-cap FAANG names and other mega-cap names. There is nothing wrong with that either; it is just simply that IGA could be a great diversifier for an investor.

Conclusion

IGA's portfolio is unique, and the top holdings share several of my favorite dividend growth stocks. That being said, they are an actively managed fund that is constantly changing. At this time, the financial representation in the fund and the industrial exposure should benefit the fund going forward. Additionally, as we know international stocks are attractively valued and due for outperformance - the global focus can be quite appealing as well.

Disclosure: I/we have a beneficial long position in the shares of ETW, BOE, ABBV, MRK, VZ, TXN either through stock ownership, options, or other derivatives. 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.