MGU: Global Infrastructure Fund That Has Appeal

Macquarie Global Infrastructure Total Return Fund (MGU)

Long only, closed-end funds, dividend growth investing, dividend investing

When we last covered MGU, the discount sat at 13.80%; this has contracted a bit but is still at an appealing 9.82% discount.

Since covering the fund, they have released their Annual Report.

The Annual Report shows us that their NII coverage has slipped a bit from the Semi-Annual, but overall, it isnt a cause for concern.

Welast coveredthe Macquarie Global Infrastructure Total Return Fund (MGU) approximately 6-months ago. We now have an updated Annual Report that we can dive into and take a look at some potential portfolio changes that are worth noting. While MGUs discount has contracted a bit, the 10.46% discount is still quite attractive for entering into a long-term position. Overall, the fund has done fairly well since the last coverage. Shares were trading at $22.73 and have now risen to $26.01 – this is with collecting a couple of distributions along the way. The NAV per share was also up to a healthy $29.05 from the prior level of $26.37.

For 2019 shares were able to pull off a stellar 41.57% total market return, with a healthy total NAV return of 33.50%. I believe this fund has more room to run as well, with its deep discount and attractive distribution. However, one may note that this fund pays on a quarterly schedule – not quite what most CEF investors are used to as we typically see monthly distributions. Dont get me wrong, I love monthly cash payments hitting my account, but I wouldnt rule out a potential holding based on that alone.

At the CEF/ETF Income Laboratory we currently hold MGU in our Tactical Income- 100 portfolio. Our Buy under discount is at 10%, which would move to a Sell rating should shares rise to parity.

As previously discussed in the prior publication, MGU has been left by the wayside for two reasons; the first is their strong tilt towards global holdings and secondly, they put more of an emphasis on the infrastructure holdings. They have approximately 67% of their holdings outside the U.S. Their portfolio composition also shows pipelines, toll roads, and airports making up almost 56% of their holdings. This isnt necessarily a bad thing but pipeline companies have been struggling with lower energy prices. With that being said, MGU has been able to still put up attractive long-term and even shorter-term performance. So again, I wouldnt want to rule this fund out completely based on that alone.

MGU has an expense ratio of 1.75%. The fund does utilize leverage, so when including these charges, the total expense ratio comes to 2.50%. The fund has total managed assets of about $479 million, with approximately 30% of this made up of leverage through borrowings. This is composed of both USD and euros. About $85 million of the borrowings are at a fixed-rate, with the remaining ~$53 million at a variable rate.

The fund has an investment objective to provide investors with a high level of total return consisting of dividends and other income, and capital appreciation. They intend to meet this objective by investing at least 80 percent of its total assets in equity and equity-like securities issued by the U.S. and non-U.S. issuers that primarily own or operate infrastructure assets.

They continue with the Fund will also seek to manage its investment so that at least 25 percent of its distributions may qualify as tax-advantaged qualified dividend income for U.S. federal tax income purposes.

In 2019 they met this goal with100% of the ordinary incomemeeting requirements regarding qualified dividend income. 2018 saw 91.09% meeting the requirement, 2017 saw 73.67%, 2016 was 80.12% and 2015 put qualified dividend income at 75.71% of the investment income. The qualified dividend income can be a significant relief on tax obligations if held in a taxable account. The track record is also showing that they have been able to easily achieve their intended target as well. For specific tax advice, I would encourage one to meet with their tax professional for specific circumstances.

Additionally, we previously mentioned that MGU could also be a good potential holding paired with Reaves Utility Income (UTG) and/or Cohen & Steers Infrastructure Fund Inc. (UTF). The latter is another holding at the CEF/ETF Income Laboratory in our Income Generator portfolio. The reasoning for such a pairing would add great diversification to a portfolio because of the funds different focuses. UTG is more heavily tilted towards utilities and is primarily composed of U.S. positions. In addition to this, UTG has relatively few holdings so they are more concentrated – which is similar to MGU with its 40 positions that werelast reported. UTF also has a global tilt but not to the extent of MGU and also includes many portfolio holdings.

All three funds – MGU, UTG, and UTF have varying exposure to energy plays. Although the latter two have much more in the way of utility exposure than energy. With that being said, I still believe MGU has been able to navigate its infrastructure pipeline/midstream holdings very well. Pipeline companies are definitely more sensitive to economic activity than the utility sector – but at the end of the day, many of these plays are stillshowing strong cash flow.

Shares of MGU had been trading at $26.01, with a NAV per share of $29.05 on February 6th, 2020. With the latest market volatility, this has pulled back to $23.46 per share, with a NAV of $26.01. This has decreased the discount to 9.82%. The average 1-year discount is 11.88%, so we do see a positive 1-year z-score of 1.02. This isnt necessarily a bad sign though, as we have seen many other stretched valuations as of the last 1-year or so with a strong upward market.

With that being said, it wouldnt be fair to not show the discounts we have seen since inception. In fact, when looking back to its 2005s inception, we see this is the tighter end of the discount range. This is when disregarding the few years after inception. The fund can be seen trading at even steeper discounts. This is also further reinforced when looking at the funds 5-year average discount of 13.32%. Again, this isnt a concern for me personally but is worth pointing out.

The positive here is that we generally see some strong performance out of the fund though. This is over the shorter-term and longer-term. It makes me confident that management is making the right decisions – even when investing in global and energy assets. As many investors know, there has been a lot of negative total returns when looking at several energy-related names. Additionally, we have seen weak performances out of our global related names.

The fund currently has a distribution rate of 7.16%, with a NAV rate of 6.46%. This is a lower-yielding fund than most CEF investors are looking for. However, over the last few years, MGU has been raising their distribution. Not only that, but you can put MGU down as one of only a handful of CEFs that have a higher NAV share price now, then when they IPOd. The fund listed at $25 share price and had an inception NAV of $23.88. I know Im not always concerned with this being a criterion personally, but it does help some other investors sleep well at night.

Pre-2008 GFC the fund had been paying out a quarterly $0.40, they dropped this down to $0.16 per share. The latest distributions have them paying out at a rate of $0.42 per share.

The dividend chart since inception is a bit skewed as they paid out an abnormally large capital gains distribution of $4.38.

When looking at the last 10-year period it is a bit more appealing and youre able to make out the increases better.

The one thing I really like about MGU is the fact that a large portion of this equity funds distribution is covered through NII. In the last Semi-Annual Report, they actually had NII coverage of over 100%. Which is almost unheard of for an equity fund. This has dropped since releasing their full 2019 Annual Report but isnt cause for concern.

From the above, we can see that NII covered 76.9% of the funds distribution to shareholders. The NII coverage did drop a bit since 2018s 78.8% coverage. However, that is because the fund had that distribution increase in 2018 from $0.37 per share to the current $0.42. Overall, we still see an uptrend in NII from year to year.

Since this is an equity fund, we would generally anticipate a portion of the distribution coming from capital appreciation anyway. In this last report, we see the shortfall at $4,844,455. On the current managed assets this works out to having to find another 1.01% through capital appreciation. This is quite an attainable level, in my opinion. I know I have mentioned it several times and it hasnt happened yet, but I could definitely see them raising the distribution again at some point. As long as the numbers keep coming out looking so good, of course.

In addition to that point, they are sitting on an unrealized appreciation of $13,959,716 or 2.88 years worth of built-in distributable gains if NII remains level. If NII was for some reason or another to drop to $0, then this could cause destructive ROC unless the distribution was cut. This is only on paper and can be lost in a blink of an eye, however, it is worth noting.

These numbers can be compared with a fund like UTG, that I mentioned above as a portfolio pair. UTG has $640 million in unrealized gains and distributes $101,291,071 to shareholders in its most recent report. This allows UTG quite a bit of leeway should we see the economy turn south. This is also reflective of the performance we have seen out of domestic U.S. positions and utilities, more specifically.

MGU provides some very handy tables that can show us exactly what their holding composition changes have been from November 30, 2018, to November 30, 2019. This is actually very useful and it would be great if we could see some other fund companies incorporating this in.

In the above table, we can specifically see that the fund had dropped quite a significant portion of what would be classified as U.S. holdings. In general, we see U.S. companies as much more stable than their global counterparts. Although, we can also see that a large portion of the reduction in U.S. holdings went to Canada. Canada isnt necessarily considered to be all that much more volatile – as far as economically speaking.

In the report, we can also see the sector changes from the same periods as above. Again, this is really neat that it is included and incredibly helpful for taking a look at the fund quickly and efficiently!

Their top sector, the pipelines, we actually see that the allocation was reduced. This appears to be more in favor of the electricity and gas distribution sector (utilities). This isnt the most aggressive change in positioning so I wouldnt anticipate the fund to act all that much different going forward. Additionally, as well as portfolio changes, this could have simply been due to lagging performance in the pipeline space. This is in contrast to the strong 2019 that utilities witnessed.

The previous top ten holdings reported in May 2019 were:

As listed in their Annual Report for November 30, 2019, the top ten included:

The position that we see dropped out of the list is NextEra Energy Inc (NEE), which was replaced with Williams Companies (WMB). NEE is a utility company while WMB is a pipeline company transporting natural gas. NEE is actually still listed as a holding, just not enough to make it in the top ten. It would actually come in at 3.3% of the portfolio.

One thing I was curious to check out is to see how the underlying positions have been raising their dividends. Thus, possibly explaining a bit of how MGUs NII continues to trend upwards. Several of these companies trade OTC in the U.S., these generally have additional risks that one needs to be aware of.

LNG does not pay a dividend, and I wasnt able to pull the data up from Ycharts on Sydney Airport (OTC:SYDDF). Additionally, National Grid (NGG) had an erratic dividend that skewed the rest of them on the chart so it was not included in the above chart.

The above is for SYDDF, so we do see that the company has paid a dividend on a semi-annual basis.

NGG also pays a semi-annual dividend. What we can see from the above is that it doesnt appear for SYDDF or NGG that they do not have an upward trend for dividends paid. Although, from the previous Ycharts we can see that several of the other positions do have a clear trend higher. This does help explain the rising trend we see for MGU itself. Thus, to the benefit of holders in MGU.

MGU is still showing an attractive discount of just under 10%. While this has historically been pretty consistent with the fund, it doesnt appear to be warranted. The fund has been able to repel the worst performances that we have seen from other global focused funds. Additionally, funds that hold significant portions of pipeline/midstream companies have seen very little advancement in the total return department since 2015. This is while MGU has been able to have heavy pipeline exposure and still be able to do significantly better. Of course, their position in utilities has also helped tremendously.

The current coverage as a percentage of their distribution is really positive as well. We have seen a dip in NII coverage since the funds last report. Overall, that isnt a concern as the fund is invested heavily in equities and we would anticipate a large portion of the distribution to be attributed to capital gains. Additionally, NII has gained from the prior year, but coverage drop was based on raising the distribution. I still remain optimistic that management could raise their distribution just based on the solid coverage numbers we see, too. Speaking of the distribution, a large portion that is tax characterized as ordinary income has been meeting the requirement for qualified ordinary income. This helps lower tax obligations for an investor if held in a taxable account. Additionally, the portion that is considered long-term capital gains also helps lower tax obligations.

MGU has come quite a long way since we last covered the fund. However, my outlook is still quite positive for the fund.

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Disclosure:I am/we are long MGU, UTF, UTG, NEE.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.

Additional disclosure:This article was originally published to members of the CEF/ETF Income Laboratory on February 6th, 2020.