NIE: CEF That Combines Growth Stocks, Covered Calls And Convertibles

AllianzGI Fairness & Convertible Revenue Fund (NYSE:NIE) is a closed-end fairness mutual fund (“CEF”) that invests in a mixture of diversified large-cap progress shares, coated calls, and income-producing convertible securities. The inventory is at present buying and selling at a reduction of 13.5 p.c to its web asset worth (“NAV”), which is considerably low. Its worth efficiency has been poor this 12 months, primarily as a consequence of poor efficiency of know-how and pharmaceutical shares. Nevertheless, as a consequence of such an enormous fall in its market worth, the fund has been capable of generate an exceptionally excessive yield of 14.5 p.c this 12 months. In any other case, the typical yield stays inside a spread of 5 to eight p.c, which additionally is sort of spectacular. Constant quarterly cost of the dividend over the previous 15 years additionally works to its benefit.

AllianzGI Fairness & Convertible Revenue Fund Has An Attention-grabbing Portfolio

NIE was launched as AGIC Fairness & Convertible Revenue Fund on Feb 27, 2007, and is co-managed by Allianz World Buyers Fund Administration LLC and Allianz World Buyers U.S. LLC. AllianzGI Fairness & Convertible Revenue Fund has $665 million in web property and has a market capitalization of $563 million. The fund employs elementary evaluation emphasizing on elements like technological innovation, aggressive benefits, return on fairness, earnings progress, wholesome steadiness sheet, regular money stream, and adequate liquidity.

The highest 50 p.c of its fairness holdings constitutes a pattern of know-how shares comparable to Microsoft Corp (MSFT), Apple Inc (AAPL), Alphabet, Inc (GOOG), Amazon.com Inc (AMZN), Tesla Inc (TSLA), Accenture plc (ACN), Reserving Holdings Inc. (BKNG), Intuit Inc. (INTU), Palo Alto Networks, Inc. (PANW), Meta Platforms, Inc. (META), ServiceNow, Inc. (NOW), and CrowdStrike Holdings, Inc. (CRWD).

Healthcare shares comparable to UnitedHealth Group Integrated (UNH), Thermo Fisher Scientific Inc. (TMO), AbbVie Inc. (ABBV), Eli Lilly and Firm (LLY), DexCom, Inc. (DXCM), McKesson Company (MCK), IQVIA Holdings Inc. (IQV), and Intuitive Surgical, Inc. (ISRG) additionally makes this record. Collectively, these two sectors – tech and healthcare – account for 51 p.c of the fund’s complete investments.

Regardless of the fund investing a comparatively low share of funds in monetary and power shares, an excellent variety of firms from these two sectors make it within the record of prime 50 p.c of the fund’s investments. Examples embody ConocoPhillips (COP), Schlumberger Restricted (SLB), Exelon Company (EXC), Devon Power Company (DVN), Wells Fargo & Firm (WFC), JPMorgan Chase & Co. (JPM), Mastercard Integrated (MA), and Visa Inc. (V). Collectively these two sectors account for round 11 p.c of the fund’s complete investments. AllianzGI Fairness & Convertible Revenue Fund has additionally made vital investments in convertible securities and employed a method of writing (promoting) name choices on the fairness shares held by the fund.

Expertise Shares Performing Poorly, Healthcare Shares As Nicely

2022 has been a comparatively dangerous 12 months for know-how and pharmaceutical shares, the place NIE has invested the vast majority of its funds. The NASDAQ 100 Expertise Sector Index (NDXT) witnessed detrimental progress throughout most months. That is even if know-how shares carried out comparatively nicely throughout 2020 and 2021 although the market was extremely impacted by covid-19 pandemic. Between April 2020 and December 2021, NDXT recorded constructive progress in 16 out of 21 months, and marginal detrimental progress within the remaining 5 months.

Worth declines within the S&P 500 Prescription drugs Index Trade (SP500-352020) began solely over the past quarter. The index virtually doubled between April 2020 and June 2021, earlier than falling by greater than 10 p.c in the course of the previous three months. Not one of the 12 know-how shares recorded constructive progress throughout this 12 months, and likewise in the course of the previous 3 months. Amongst these 8 healthcare shares, solely MCK and LLY recorded vital progress in 2022. DXCM was capable of submit vital progress in the course of the previous three months.

Mixture Of Development Shares, Coated Calls, Convertibles Delivering Fruits

Luckily, AllianzGI Fairness & Convertible Revenue Fund invested greater than 35 p.c of its fund in convertible securities, with a weighted common maturity of three.7 years. Convertible securities traditionally outperformed conventional mounted earnings securities during times of rising rates of interest. Convertible securities additionally defend NIE from excessive volatility of progress shares within the above-mentioned sectors. Nevertheless, the weighted common coupon is sort of low at 1.44 p.c, which in any other case will fail to generate robust return.

So, these securities might be finest used as a cushion. Allianz World Buyers Fund Administration LLC runs one other fund, AllianzGI Diversified Revenue & Convertible Fund (ACV), which places a lot increased emphasis on convertible securities than the fairness shares. ACV has misplaced 48 p.c of its worth in the course of the previous 1 12 months, whereas NIE misplaced 31 p.c.

Lack of exports ensuing from strengthening of the U.S. greenback, rising inflation, low degree of shopper spending, improve in oil-price, provide chain breakdown because of the conflict in Ukraine, had a serious impression on the mega-cap know-how and pharmaceutical giants. Healthcare shares aside from the prescribed drugs did comparatively higher. All these detrimental impacts of a depressionary market state of affairs led to a fall out there worth of NIE. Nevertheless, I really feel these bearish traits shall be over inside a number of months and these shares will come again to their long-term progress trajectory. As well as, AllianzGI Fairness & Convertible Revenue Fund can also be benefiting from its coated name technique.

Coated name is a hedging technique through which the fairness shareholder sells a name possibility on the identical shares that he/she is holding and thus receives an upfront possibility premium, for endeavor the chance of potential loss within the name possibility. By this manner, the fairness shareholder earns extra money flows that create further earnings. Coated name CEFs like AllianzGI Fairness & Convertible Revenue Fund additionally benefit from the scope of producing risk-adjusted returns considerably increased than fairness solely portfolio that doesn’t make use of any hedging technique. Based on America’s largest funding administration agency BlackRock, “through the use of an fairness coated name technique, traders can cut back portfolio volatility by capturing possibility premiums, with out having to sacrifice long-term efficiency.”

Funding Thesis

Traditionally AllianzGI Fairness & Convertible Revenue Fund has been a fairly good fund with a fairly robust yield and exceptionally excessive complete return over the long run. It has been delivering constant quarterly distributions for the previous 15 years, regardless of dealing with the 2008 international monetary disaster, and covid-19 pandemic. Over the previous 5 and 10 years, the fund generated complete returns of 48 p.c and 156 p.c, respectively.

Writing name choices on the bulk shares of its fairness portfolio has made it simpler for NIE to supply a gradual yield. Convertible securities additionally defend NIE to a sure extent from excessive volatility of large-cap shares within the know-how and pharmaceutical sectors. With NIE falling for all the 12 months of 2022 and the fund at present buying and selling at a deep low cost of 13.5 p.c, now is likely to be an excellent time to purchase NIE.