DEX: This Balanced Closed-End Fund Is Trading At A Big Discount
Summary DEX is a leveraged, global balanced CEF about 60% equities, 40% bonds. The 17+% discount to NAV is at three year highs. High distributions produce alpha by capturing some of the discount with every monthly payout. The Delaware Enhanced Global Dividend and Income Fund (NYSE: DEX ) was formed in June, 2007. It invests globally in income-generating securities across multiple asset classes. (Data below is sourced from the Delaware Investments website unless otherwise stated.) The Fund’s primary investment objective is to seek current income, with a secondary objective of capital appreciation. The Fund also uses enhanced income strategies by engaging in dividend capture trading, option overwriting, and realizing gains on the sale of securities, dividend growth and currency forwards. There could be a good medium-term trading opportunity in DEX setting up from now until year-end because of tax loss selling. Over the last year, the average discount to NAV has been -12.75%, while it is currently around -17%. The 1-year discount Z-score is -2.20, which means that the current discount to NAV is more than two standard deviations below the average. Source: cefanalyzer Three Year Historical Premium/Discount for DEX (click to enlarge) From an overall asset allocation perspective, DEX is similar to a global 60-40 balanced fund, but because of the leverage and wide range of asset classes, it is much more diverse than a typical balanced fund you would find at Vanguard or Fidelity. Under normal conditions, the Fund will invest: At most 60% of its net assets in securities of U.S. issuers. At least 40% of its net assets in securities of non-U.S. issuers (but the fund managers have discretion to lower this percentage to 30% if they feel market conditions are unfavorable). This was the asset allocation breakdown as of June 30, 2015: Asset Allocation Breakdown Large-Cap Value 11.54% Real Estate 2.80% International equity 29.76% Emerging markets equity 6.51% Convertible securities 13.13% High yield bonds 32.68% Investment grade bonds 2.36% Other 1.24% DEX has had about average long term NAV performance. But it may be good for a swing trade now because of the very high discount to net asset value. Since inception, it had one big losing year in 2008 when the net asset value fell -38.52%, and it is also struggling so far this year. Here is the total return NAV performance record since inception along with its percentile rank compared to Morningstar’s World Allocation category: DEX NAV Performance World Allocation NAV Percentile Rank in Category 2008 -38.52% -39.30% 50 2009 +48.43% +46.71% 38 2010 +16.60% +23.98% 50 2011 -1.44% -3.21% 38 2012 +17.68% +19.81% 34 2013 +19.01% +11.07% 34 2014 -0.46% +6.14% 90 YTD -7.10% -5.76% 73 The “Top 5” tables below are all as of June 30, 2015: Top 5 Countries United States 51.02% Japan 7.96% France 5.79% United Kingdom 5.24% Canada 2.88% Top 5 foreign equity holdings Teva Pharmaceutical (NYSE: TEVA ) 1.35% Mitsubishi UFJ Financial ( OTCPK:MBFJF ) 1.30% AXA S.A. ( OTCQX:AXAHY ) 1.15% Novartis AG (NYSE: NVS ) 1.14% Toyota Motor (NYSE: TM ) 1.12% Top 5 U.S. equity holdings CA Inc. (NASDAQ: CA ) 0.55% AT&T Inc. (NYSE: T ) 0.52% Pfizer Inc. (NYSE: PFE ) 0.49% ConAgra Foods Inc. (NYSE: CAG ) 0.49% Merck & Co. Inc. (NYSE: MRK ) 0.48% Top 5 U.S. fixed income holdings Inter-American Development Bank 0.46% NuVasive Inc. 0.42% Meritor Inc. 0.41% Blackstone Mortgage Trust Inc. 0.39% Cardtronics Inc. 0.38% Top 5 foreign fixed income holdings Indonesia Govt. Intl. Bond 0.73% Mexican Bonos 0.65% Mexico Govt. Intl. Bond 0.56% Indonesia Govt. Intl. Bond 0.53% Australia & N. Zealand Banking 0.49% Bond Rating Distribution AAA 8.38% AA 0.15% A 5.40% BBB 9.73% BB 24.63% B 36.34% CCC 15.24% CC 0.09% D 0.04% DEX is run by a large team of eleven portfolio managers, which is helpful because of the many asset classes held in the fund. Nine of the managers have earned the CFA designation. The lead manager is Roger A. Early, CPA, CFA. Roger is a Managing Director, Head of Fixed Income Investments with 39 years industry experience. He has been with the fund since 2008. Alpha is Generated by High Discount + High Distributions The high distribution rate of 9.34% along with the 17% discount allows investors to capture some alpha by recovering some of the discount whenever a distribution is paid. Whenever you recover NAV from a fund selling at a 17% discount, the percentage return is 1.00/ 0.83 or about 20.5%. So the alpha generated by the 9.34% distribution is computed as: (0.0934)*(0.205)=0.01915 or about 1.92% a year. Note that this is more than the 1.13% baseline expense ratio, so you are effectively getting the fund managed for free with a negative effective expense ratio! Here are some summary statistics on DEX: Delaware Enhanced Global Dividend and Income Fund Total Assets: 273 Million Total Common assets: 186 Million Annual Distribution (Market) Rate= 9.34% Last Regular Monthly Distribution= $0.075 (Annual= $0.90) Fund Baseline Expense ratio: 1.13% Discount to NAV= -17.44% Portfolio Turnover rate: 56% Credit Rating: Fixed income holdings are mainly high yield Effective Leverage: 30.35% Average Daily Volume (shares)= 65,160 (Source: Yahoo Finance) Average Dollar Volume = $630,000 DEX is only a moderately liquid stock and usually trades with a bid-asked spread about two cents. There is often limited size available on both the bid and asked, so some care must be taken when trading DEX. DEX is an attractive purchase at current levels when the discount to NAV is 15% or higher, although there may be even additional opportunities later this year when tax loss selling kicks in. A reasonable trading approach may be to scale in gradually over the next few months.