HGLB: High-Yielding Global Balanced CEF Beating The Broader Market

By Snehasish Chaudhuri, MBA (Finance).

Highland Global Allocation Fund (NYSE:HGLB) is a closed-end balanced fund (“CEF”) that invests its assets in equity markets around the globe and also in fixed-income securities. The fund has an expense ratio of 0.73 percent, and an asset under management (“AUM”) of $271.25 million. Currently, it has invested 60 percent of its assets in U.S. stocks, and 20 percent in fixed income securities, mostly of investment grade.

The fund bets on some private enterprises and relies heavily on three sectors – real estate, information and communication technology (ICT) and energy. These three sectors account for 85 percent of its entire portfolio. A big drawback about investing in private firms is that they are difficult to value and not highly sought after. As a result, investors have a tendency to undervalue this fund, as is exhibited by HGLB’s price of $9.62, which is a 21 percent discount to its net asset value (NAV).

HGLB’s Top Investments in Public Equities Have Delivered Satisfactory Results

The fund has a very concentrated portfolio. While it invests in 66 securities, the top ten holdings account for almost 60 percent of its total portfolio of investments. The fund bets big on TerreStar, a privately held firm, accounting for almost one-fourth of its entire assets. It invested 18.6 percent in its equity stock, and 6.2 percent in its term loan. Terrestar operates integrated satellite and terrestrial telecommunications systems, and a nationwide licensee of wireless spectrum. HGLB also invested almost 18 percent of its assets in energy and chemical firms such as Targa Resources Corp (TRGP), Energy Transfer LP (ET), and Western Midstream Partners LP (WES). Surprisingly these stocks recorded positive price growth, and TRGP & ET grew by more than 30 percent.

HGLB’s other major equity holdings include a substantial number of real estate firms like NexPoint Real Estate Finance Inc (NREF), NexPoint Residential Trust Inc (NXRT), NexPoint Diversified Real Estate Trust (NXDT), Alexandria Real Estate Equities Inc (ARE), Whitestone REIT (WSR), Healthcare Realty Trust Inc (HR), GAF REIT, Gaf Reit Sub Ii Llc, and Braemar Hotels & Resorts Inc (BHR). 29 percent of its assets are invested in the real estate sector, including bonds. Although all these stocks recorded a negative price growth during the past one year, all of them barring NXDT recorded decent to high positive price growth over the past three months. If such trends sustain, that will be a good thing for investors of Highland Global Allocation Fund.

HGLB’s Rated Fixed Income Portfolio Enables it to Generate Strong Yields

GAF REIT and Gaf Reit Sub Ii Llc are private entities, not listed in the stock market, similar to that of Terrestar. Together, these three account for 1/3rd of HGLB’s assets. Its fixed income securities portfolio include Quarternorth Tranche 3, Txu Tceh Tra Rights, Sovereign bond of Argentina 3.5 percent, FREMF MORTGAGE TRUST 9.3 percent, Nexpoint Sfr Note, Nht Convertible Prom Note and Quarternorth Penny Warant. The fund also invests in funds like Teucrium Corn ETF (CORN), NexPoint Event Driven Z (HHCZX), and Highland Income Fund (HFRO).

Due to its significant investments in fixed income securities, Highland Global Allocation Fund has been able to generate strong yields. It pays a monthly dividend, and during the past four years of its existence, the fund generated an annual average yield of 11.5 percent.

Based on such a high yield, Highland Global Allocation Fund has been able to generate an annual average total return of 19 percent in between 2020 and 2022, which is outstanding considering the performance of the broader market during the same period. During the same period, the S&P500 Index (SP500) grew by an average of less than 10 percent.

I am quite optimistic about strong returns in the coming years due to satisfactory performance of its top public equity portfolio and high average coupon of 8.22 percent earned on its fixed income portfolio. These fixed income securities also possess high credit ratings, and almost three-fourth of its bonds are rated investment grade. Average credit rating of the entire fixed income portfolio is rated A. This is encouraging, since 70 percent of its fixed income portfolio composes corporate bonds. Moreover, effective maturity of this fixed income portfolio is also decent at 6.77 years.

Testing My “7 Factor Model for Evaluating Global Funds” on HGLB

I find Highland Global Allocation Fund to be attractive according to my “7 Factor Model for Evaluating Global Funds.” It qualifies for the minimum requirements with respect to assets under management (“AUM”), stock price, and generated double-digit yield during the past four years of its existence. Its top allocations in public equity stocks delivered satisfactory performance. Based on such high yield, HGLB has been able to generate an annual average total return much higher than the broader market.

Moreover, the fund pays monthly dividends, and is trading at a deep discount. The majority of its fixed income security portfolio also possesses an investment grade credit rating and a decent effective maturity. HGLB thus becomes quite lucrative, provided that it can sustain its current level of yield.

On the flip side, a significant proportion of HGLB’s assets are invested in ICT, real estate and energy sectors. I am not extremely optimistic about returns of companies operating in the real estate and energy sectors. Although I am quite bullish about the stocks in the ICT sector, the largest bet of HGLB in the ICT sector is in a private enterprise, which I believe is quite hard to value. So, there lies significant risk in terms of valuation of this fund, and such a deep discount should be nothing to be excited about. I believe such discounts will always prevail.

However, generating a strong yield should not be difficult for Highland Global Allocation Fund, due to satisfactory performance of its top public equity portfolio and high average coupon earned on its fixed income portfolio. Also, these securities have a high credit rating. In my opinion, Highland Global Allocation Fund is a good option for both income-seeking and growth-seeking investors.