GGN: High-Yield CEF A Safe Bet In Current Economic Scenario

The GAMCO Global Gold, Natural Resources & Income Trust (NYSE:GGN) is a closed ended equity mutual fund launched by GAMCO Investors, Inc. This Gabelli Funds, LLC. managed mutual fund invests in public equity markets across the globe. It also takes a short position in some of its stocks, and tries to gain from it. As the name suggests, it primarily invests in companies engaged in the business of gold, mining, energy and other natural Resources. Despite gradually decreasing its pay-out by almost 79 percent, the fund has recorded an average yield of almost 13 percent over the past 10 years. That was possible due to an 80 percent drop in the market price.

GAMCO Global Gold, Natural Resources & Income Trust

According to the company material:

The fund invests in stocks of companies principally engaged in the gold and natural resources industries including companies principally engaged in the exploration, mining, fabrication, processing, distribution, or trading of gold, or the financing, managing and controlling, or operating of companies engaged in gold related activities. It also invests in equity securities of companies principally engaged in the exploration, production, or distribution of natural resources, such as gas and oil, paper, food and agriculture, forestry products, metals, and minerals as well as related transportation companies and equipment manufacturers.

The fund was formed with the name of GAMCO Global Gold, Natural Resources & Income Trust by Gabelli. As part of its investment strategy, GGN intends to earn through covered call options on equity securities in its portfolio. In the covered call strategy, GGN writes (selling) call options and earns the premium on it. The short position in call options is a little over 7 percent of its total portfolio, while the long position in equity investments stands at little over 85 percent. Out of this 47 percent was invested in overseas equity markets. The cash component is in excess of 21 percent of the entire portfolio.

Dividend & Price Performance

GGN has been paying a monthly dividend since it was formed on January 4, 2005 and has consistently paid dividends for over 17 years. The company started with a monthly pay-out of $0.14 and continued it for almost 8 years. However, since the fourth quarter of 2012, it has gradually reduced the pay-out amount to reach the present level of $0.03. However despite the reduction in pay-out, the annual average yield was in excess of 12 percent in the last decade. Since 2020, the yield has come down, but still is around 10 percent.

High yield despite gradual reduction of pay-out means only one thing – the price is moving downwards on a consistent basis. During the past decade, the price dropped from $19.5 in February, 2011 to $2.65 in March 2020. During March 2020, as we all know, the US equity market crashed due to the covid-19 pandemic. The stock marginally recovered from that bottom, and at the end of trading week 17th June, 2022, it was trading at $3.66. Still the downfall is almost 80 percent from the 2011 peak price. The net asset value (NAV) of this fund stands at $3.74.

Portfolio

57 percent of its equity investments are in basic materials, that includes gold, and the remaining 43 percent are in stocks of the energy sector. The fund has a reported turnover of 96 percent, which means almost all the stocks have been replaced this year. Top 60 percent portfolio includes 7 gold mining companies – Newmont Corporation (NEM), Franco-Nevada Corp (FNV), Barrick Gold Corp (GOLD), Northern Star Resources Ltd (OTCPK:NESRF), Endeavour Mining plc (OTCQX:EDVMF), Alamos Gold Inc. (AGI), and B2Gold Corp. (BTG).

There are other globally renowned mining stocks like Rio Tinto Group (RIO), Freeport-McMoRan Inc (FCX), Wheaton Precious Metals Corp. (WPM), BHP Group Limited (BHP), and Agnico Eagle Mines Limited (AEM). The fund has also invested significantly in most renowned energy stocks such as Chevron Corporation (CVX), Exxon Mobil Corp (XOM), Schlumberger Limited (SLB), Shell plc. (SHEL), ConocoPhillips (COP), BP p.l.c. (BP), Halliburton Company (HAL), EOG Resources, Inc. (EOG), Pioneer Natural Resources Company (PXD), Kinder Morgan, Inc. (KMI), and TotalEnergies SE (TTE). I expect most of these stocks to generate strong positive returns under the current economic scenario, and to sustain a double digit yield for GGN.

Commodity Stocks Are a Better Bet in Current Economic Scenario

“Persistent inflationary pressure, geopolitical turmoil and worries about a potential recession have dragged the S&P 500 down 13% this year.” At the same time, stocks in the energy sector have climbed about 45%. Gold prices moved downwards last year and started 2022 with declines, but since February it witnessed an upward movement. According to Wall Street Journal reporter Simon Constable, “After years in the investing wilderness, commodities are hot again. And it looks as if the rally may continue for at least the foreseeable future.”

A natural consequence should have been an upward movement in gold sector equity funds. However, this has not been the case so far. The YTD growth of VanEck Gold Miners ETF (GDX) was -5 percent , VanEck Vectors Junior Gold Miners ETF (GDXJ) was -12.3 percent, iShares MSCI Global Gold Miners ETF (RING) was -10 percent, Sprott Gold Miners ETF (SGDM) was -2.3 percent, U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU) was -10.5 percent, Global X Gold Explorers ETF (GOEX) was -12.6 percent.

Commodity sector funds however, have recorded huge growth in 2022. The Invesco DB Commodity Index Tracking Fund (DBC) grew by +38 percent. First Trust Global Tactical Commodity Strategy Fund (FTGC) grew by 23.5 percent, United States Commodity Index ETF (USCI) grew by 35 percent, iShares Commodities Select Strategy ETF (COMT) grew by 40 percent, iPath Pure Beta Broad Commodity ETN (BCM) grew by 28 percent, and First Trust Alternative Absolute Return Strategy ETF (FAAR) grew by almost 20 percent.

The energy sector funds also made huge gains this year. iShares Global Energy ETF (IXC) grew by 29 percent, iShares MSCI Global Energy Producers ETF (FILL) grew by 25 percent, Invesco DWA Energy Momentum ETF (PXI) grew by 38 percent, Vanguard Energy Index Fund Admiral Shares Inst (VENAX) grew by 39 percent, and Invesco S&P SmallCap Energy ETF (PSCE) grew by 37 percent. It is believed that “commodities tend to rise alongside inflation and serve as a hedge against declines in the other assets in a portfolio… Rising Covid-19 cases in China and a stronger U.S. dollar, however, have dragged some commodities off their highs.”

Valuation

GGN benchmarks its performance against the CBOE S&P 500 BuyWrite TR Index. Despite such a huge price fall, a study of price multiples doesn’t indicate an undervaluation for GGN. Weighted average Price/Cash flow (P/CF) ratio of the component stocks of GGN comes to around 5.84, compared to the index’s P/CF ratio of 4.47. CLM’s Price/Equity (P/E) ratio (13.02) is also higher than that of the index (8.19). The price/sales (P/S) of 1.67 which is also higher than that of the index (1.04) These price multiples indicate GGN’s valuation is slightly on the higher side. Only, the Price to Book (P/B) ratio of 1.92 is at par with the P/B ratio of the index.

A series of geo-political events, like unfavorable weather, pandemic-related disruptions, and Russian invasion of Ukraine have resulted in a shortage of supplies. The supply chain breakdown reduced supplies further and sent commodity prices higher. Although the impacts have not yet been reflected in the funds involving equity of gold mining companies, energy and commodity funds have generated high growth during 2022. Hopefully a positive impact will be felt in gold and natural resources based funds like GGN in near future.

Another point to note is the high cash component in GGN’s portfolio, which I believe will be beneficial for this fund, as it will be able to take advantage of better values of various stocks. This high cash phenomenon has been increasing within the fund operators as the inflation stays high and recession looms in. As GGN’s share doesn’t seem to be undervalued, I am skeptical about an enormous price growth (like what we witnessed in the case of commodity and energy funds). However, the double digit dividends are a good enough reason for considering this stock as part of an investment portfolio. As the price is extremely low at $3.66, a sustainable double digit yield looks lucrative for the income seeking investors.