A Strong Covered Call Fund Whose Diversification And Value Are Advantages
A Compelling Idea
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
Two segments of the market that have struggled to keep up over the past year - international stocks and dividend stocks - have slowly been making a comeback. The former group continues to struggle with recession risk and policy path uncertainty, but the rebound in value and cyclical stocks has been helping. The latter group has gotten a similar boost along with the slow momentum build in defensive positioning. The markets seem to be in this weird place where it wants to push higher based on the growth/Fed easing narrative, yet also wants to exercise caution due to the rising inflation/Japan risk stories. That potentially presents a window of opportunity for covered call strategies to outperform in this tug of war.
The BlackRock Enhanced Global Dividend Trust (BOE) is one fund on my radar that may be able to take advantage of all of these factors. Its cyclical tilt could be advantageous if the market keeps moving higher, but its modest degree of volatility, value characteristics and high income strategy could also add some protection should the markets turn south. With the markets looking at a potentially wide range of outcomes based on a number of factors, aiming for the middle ground could end up producing the best risk-adjusted returns.
Fund Background
BOE’s primary investment objective is to provide current income and current gains, with a secondary objective of long-term capital appreciation. It invests primarily in large-cap dividend-paying equity securities with at least 40% of its assets outside of the United States. It also intends to write covered put and call options with respect to approximately 30% to 45% of its total assets.
In many ways, BOE is built for this type of environment - one in which investors are still willing to be bullish based on near-term economic strength, but cognizant of the risks developing elsewhere in the world. Covered call funds generally perform best in sideways-trending, lower volatility environments. I can’t say we’re necessarily heading into that given the number of tail risk exposures that are out there, but the extra yield and tilt towards more durable, higher quality dividend payers could provide some downside protection should things start looking worse.
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