Aberdeen Global Opportunity Income CEF: Unsupported Dividend

Thesis

First Trust/Abrdn Global Opportunity Income Fund (FAM) is a fixed income CEF. As per its literature:

The Fund’s primary investment objective is to seek a high level of current income. As a secondary objective, the Fund seeks capital appreciation. The Fund pursues these objectives by investing its Managed Assets in the world bond markets through a diversified portfolio of investment grade and below-investment grade government and corporate debt securities. “Managed Assets” means the total asset value of the Fund minus the sum of the Fund’s liabilities other than the principal amount of borrowings, if any.

The fund is down over -20% on a one-year lookback as rates have risen across jurisdictions. The fund employs a 31% leverage ratio, which has magnified the negative returns in the past year. However, when looking at this CEF and its peers on a 5-year lookback we can observe the fund lagging substantially. The CEF has an unsupported dividend, with over 50% of the cash-flow being return of capital. This is a very toxic composition that results in NAV erosion and chronic underperformance. Given the fund’s small size of $60 million, we might see it being merged with another fund in the future.

FAM has been significantly affected by rising global rates in the past year, but the fund is a chronic underperformer when looking at a similar cohort. We also do not like the fact that the vehicle is using such a high ROC ratio. Given the expected peaking in rates this year we are rating this a Hold given the partial recovery that is going to occur in the upcoming year. However new money should look elsewhere. This is not a good long-term holding.

Analytics

AUM: $0.06 billion.

Sharpe Ratio: -0.63 (3Y).

Std. Deviation: 15 (3Y).

Yield: 8.8%.

Premium/Discount to NAV: -12%.

Z-Stat: -0.86.

Leverage Ratio: 31%

Performance

The fund is the clear underperformer in the cohort on a 1-year lookback:

We can see how other world bond funds have re-traced some of their 2022 drawdowns, whereas FAM has not. On a longer-term time-frame the CEF’s returns look equally appalling:

We can see FAM at the bottom of the performance chart here. Long term performance speaks to the management and composition of a fund. While its peers have performed and managed positive total returns, especially when looking at EMB and FCO, FAM has not.

Holdings

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

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

From a country stand-point the dispersion is fairly 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 Fx exposure is fairly muted here, with rates the main risk driver in this fund.

Premium/Discount to NAV

The fund’s discount to NAV has a high beta to the interest rate curve:

As the Fed did not pivot in August, but actually continued to increase rates, the fund’s discount to NAV widened substantially by over 10%. That is a very significant number, and the risk-on rally as of late has only made a very small dent in that discount. Until peak global rates is in, we are going to see a substantial discount here.

The fund had moved to being flat to NAV as central banks across the world moved to quantitative easing after the Covid pandemic crisis:

Distribution

The fund’s distribution is not supported:

We can see from the latest Section 19.a form the breakout of the dividend. The return of capital component is extremely high here, at over 50%. This is not only unsustainable, but also damaging to the fund’s NAV and future performance. The higher the ROC utilization in the fund, the worse the future returns in the vehicle. Return of principal results in a lower 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 historic performance, especially when compared to a cohort of similar world bond CEFs. Furthermore, the fund utilizes a very high amount of ROC to support its stated dividend yield (over 50% ROC). This has resulted in an ever shrinking asset base, and given the fund’s small size at $60 million, we might see this name merged with another fund in the near future. Currently the CEF’s discount to net asset value is -12%, and we expect this to persist. Because we are nearing a peak level in global rates, we expect this CEF to recoup some of its loses in the next year, however this is a very poor fund on a long term basis. New money should look elsewhere.

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