AOD: Global Equities Fund With Stable 8% Distribution, Massive 14% Discount To NAV

ETFS

A long-time reader and subscriber asked me for my thoughts on the Aberdeen Total Dynamic Dividend Fund (AOD), an unleveraged global equities CEF. AOD follows an aggressive proprietary investment strategy, but an ultimately unsuccessful one, due to its focus on some of the worst-performing markets, industries, and stocks, to the exclusion of the best and strongest. AOD’s subpar investment strategy has led to consistent underperformance in the past and will, I believe, continue to do so in the future.

Investors interested in global equity funds could consider alternatives. I believe that the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) and the Lazard Global Total Return & Income Fund (LGI), two of the only global equity funds with a strong track record of shareholder performance, are good choices in this space.

AOD Basics

  • Sponsor: Aberdeen Standard Investments
  • Distribution yield: 8.44%
  • Expense ratio: 1.18%
  • Total Returns CAGR (NAV – 10Y): 6.96%
  • Discount to NAV: 14.44%

AOD Overview – Global Equities Fund

AOD is an unleveraged global equities CEF.

International equities are an interesting asset class.

In theory, and according to some very interesting Morningstar research, many actively-managed global and international equity funds are able to consistently outperform, due to the inefficiencies of many overseas markets.

In practice, very few of the funds I’ve researched have managed to match, let alone surpass, the performance of their respective indexes. AOD is no exception.

The fund follows a proprietary investment strategy focusing on factors with a decades-long track record of outperformance, including growth, value, and dividends.

(Source: AOD Factsheet)

AOD’s investment strategy has led to some marked deviations from its index, at least according to management metrics. This isn’t a closet index fund, it’s a high-conviction high-risk fund, and one with the potential for strong gains.

(Source: AOD Factsheet)

As we shall soon see, these deviations have generally lead to shareholder losses, fewer gains, and sustained underperformance in the past.

AOD, like most other global equity funds, focuses on U.S. stocks, with smaller investments in developed markets, including Germany and the United Kingdom, and even smaller investments in emerging markets. Diversified holdings help to reduce portfolio risk and volatility, and provide AOD’s investors with all the global equity exposure and international diversification that they realistically need, albeit with subpar returns.

Unlike most other global equity funds, AOD is slightly underweight U.S. equities, with these comprising about 51% of the value of the fund, versus 55%-60% for most of its peers and index.

(Source: AOD Factsheet)

Index country allocations:

(Source: ETF.com)

AOD underweighting U.S. equities has had a negative impact on the fund’s performance for all relevant time periods, as U.S. equities have outperformed international equities during the same:

ChartData by YCharts

AOD’s country weights also show some differences with that of its index, albeit smaller. These differences have also led to losses or smaller gains in the past. As an example, AOD is underweight Japan but overweight Brazil, countries which have outperformed/underperformed during these past few months:

ChartData by YCharts

Seems quite clear that AOD’s investment methodology has been unsuccessful in selecting the best countries to invest in these past few years.

AOD’s holdings are also reasonably well-diversified across industries, as is the case for most other global equity funds. Unlike these, AOD is slightly underweight tech, with said industry accounting for 17% of the value of the fund, versus 24% for the fund’s index:

(Source: AOD Factsheet)

(Source: ETF.com)

Underweighting tech has been detrimental to AOD and its shareholders, as said industry has performed exceedingly well during these past few years. Tech has also massively outperformed these past few months, as the industry thrives during the coronavirus-induced lockdowns, work-from-home initiatives, and the like:

ChartData by YCharts

AOD’s holdings themselves are also reasonably well-diversified, with the top ten holdings accounting for just 17.9% of the fund’s total value, only slightly more concentrated than VT.

(Source: AOD Factsheet)

AOD’s holdings themselves also show some marked deviations from its index. Most importantly, the fund isn’t invested in many household names, including Amazon (AMZN), Facebook (FB), and Johnson & Johnson (JNJ), amongst others, which means that the fund’s performance can deviate quite strongly from that of its index. The exclusion of many of these stocks, especially Amazon, has been particularly harmful for the fund and its shareholders, as they have outperformed during the year and ongoing coronavirus outbreak:

ChartData by YCharts

AOD’s investment strategy seems like a failure. The fund consistently picks the wrong markets, industries, and stocks, and fails to select some of the best of each. Strategies can always improve but, as mentioned previously, I see no reason to believe that this will be the case.

With the above in mind, let’s take a look at AOD’s performance.

Performance Analysis – Weak Shareholder Returns

AOD’s broadly unsuccessful investment strategy has led to subpar performance since inception, and for all relevant time periods. The fund consistently underperforms broad global equity index funds, including VT and the iShares MSCI World ETF (URTH), by about 1-3% per year on both a price and NAV basis.

(Source: SeekingAlpha – Chart by author)

AOD also generally underperforms ETO and LGI, my preferred global equity CEFs, and two funds with reasonably strong past performance:

(Source: SeekingAlpha – Chart by author)

AOD’s underperformance is, in my opinion, strong evidence that the fund’s investment strategy is simply ineffective. It is possible that said strategy could yield better results in the coming months or years, tech seems overvalued while most other industry segments should see improving fundamentals, valuations, and share prices as the coronavirus outbreak subsides, but I strongly doubt that the fund’s long-term performance can materially improve. AOD’s investment managers have had more than a decade to develop and implement a successful investment strategy, they have been unable to do so in the past, and I believe that that will continue to be the case in the future.

AOD does look slightly better from a dividend perspective, with the fund maintaining a generally stable dividend since 2013, while both ETO and LGI have seen large +20% dividend cuts in the past year or two. If you take a longer-term view the situation is a bit more unclear, with AOD suffering larger dividend cuts in the past, and with both ETO and LGI seeing some growth.

(Source: SeekingAlpha – chart by author)

As a final point, AOD is currently trading with a compelling 14.40% discount to NAV, slightly higher than average for the fund and its peers. AOD’s strong discount to NAV is definitely a positive for the fund and its shareholders, although not one that can compensate for its subpar performance, in my opinion.

AOD’s discount is slightly larger than that of its peers, but not significantly so. LGI, a fund with significantly stronger shareholder returns in the past, trades with a comparable 13.85% discount.

(Source: Cefconnect.com)

Conclusion – Stronger Choices Out There

AOD’s investment strategy has led to sustained underperformance in the past and will, I believe, continue to do so in the future. In my opinion, investors should consider other global equity funds, with ETO and LGI being my top two choices in this space.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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