Aberdeen Global Opportunity Income CEF: Unsupported Dividend – Chasing Alpha

Thesis

First Trust/Abrn Global Opportunity Income Fund (FAM) is a fixed income CEF. According to his literature:

The primary investment objective of the Fund is to seek a high level of current income. As a secondary objective, the Fund seeks to capital appreciation. The Fund pursues these objectives by investing its managed assets in global bond markets through a diversified portfolio of investment grade and lower quality government and corporate debt securities. “Assets under Management” means the total value of the assets of the Fund less the sum of the liabilities of the Fund other than the principal amount of borrowings, if any.

The fund is down more than -20% year-on-year as rates rose in all jurisdictions. The fund uses a leverage ratio of 31%, which has amplified negative returns over the past year. However, when we look at this CEF and its peers over a 5 year period, we may find that the fund is significantly behind schedule. The CEF has an unsupported dividend, with more than 50% of cash flow being made up of return of capital. It is a highly toxic composition that leads to erosion of net asset value and chronic underperformance. Given the fund’s small size of $60 million, we may see it merging with another fund in the future.

FAM has been significantly impacted by rising global rates over the past year, but the fund has chronically underperformed a similar cohort. We also don’t like that the vehicle uses such a high ROC ratio. Given the expected peak in rates this year, we rate this as holding given the partial recovery that will occur over the coming year. However, the fresh money should look elsewhere. This is not good long term hold.

Analytic

AUM: $0.06 billion.

Sharpe ratio: -0.63 (3 years).

Standard. Deviation: 15 (3Y).

Yield: 8.8%.

Premium/Rebate on NAV: -12%.

Z-Statistic: -0.86.

Leverage ratio: 31%

Performance

The fund is clearly the worst performer of the cohort over one year:

We can see how other global bond funds have retraced some of their 2022 drawdowns, while FAM has not. Longer term, CEF returns look equally abysmal:

We can see FAM at the bottom of the performance chart here. Long-term performance talks about the management and composition of a fund. While its peers have achieved and managed positive total returns, particularly for EMB and FCO, FAM has not.

Assets

The CEF holds a mix of global bonds, with an overweight position in government bonds:

We can see a US 6-year bond as the top holding here at 15%, followed by a large position in Brazilian Treasuries.

From a national point of view, the dispersion is quite wide:

Mexico and Brazil have very large weightings, followed by South Africa and Australia. The fund is composed mainly of Usd bonds:

This means that currency exposure is quite moderate here, with rates being the main risk factor for this fund.

Premium/Rebate to NAV

The fund’s discount to net asset value has a high beta to the yield curve:

As the Fed did not pivot in August, but in fact continued to raise rates, the fund’s discount to NAV widened significantly by more than 10%. This is a very significant number, and the rally in risk lately has only made a very small dent in this discount. Until peak global rates are reached, we are going to see a substantial discount here.

The fund had gone flat against net asset value as central banks around the world shifted to quantitative easing following the Covid pandemic crisis:

Distribution

Distribution of the fund is not supported:

We can see in the last section 19.a of the form the breakdown of the dividend. The capital return component here is extremely high, at more than 50%. This is not only unsustainable, but also detrimental to the fund’s net asset value and future performance. The higher the ROC utilization in the fund, the worse the future returns of the vehicle. The return on principal results in a weaker asset base year over year and lower returns as the market recovers.

Conclusion

FAM is a fixed income CEF. The vehicle invests its cash in global bonds, with an emphasis on government bonds. The fund has a very poor historical performance, especially when compared to a cohort of similar global bond CEFs. Additionally, the fund uses a very high amount of ROC to support its declared dividend yield (over 50% ROC). This has resulted in a steadily shrinking asset base, and given the fund’s small size at $60 million, we may see this name merged with another fund in the near future. Currently, the CEF discount to net asset value is -12%, and we expect this to persist. Given that we are approaching a record high in global rates, we expect this CEF to recoup some of its losses next year, but it is a very poor fund over the long term. New money should look elsewhere.

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