Highland Global Allocation Fund: A Blended Strategy for Attractive Returns

Highland Global Allocation Fund (HGLB) is a closed-end fund that aims to provide attractive total returns through a blended portfolio of equities and debt-focused securities. This approach can be an efficient way to balance risk and return, and HGLB's performance has been solid over the years. As a finance expert with experience at Bloomberg, I would recommend this fund for investors looking for a balanced and diversified investment strategy.

Highland Global Allocation Fund (HGLB), a closed-end fund, aims to provide attractive total returns through a blended portfolio of equities and debt-focused securities. This strategy offers a balanced approach to risk and return, making it an attractive option for investors seeking diversification. Over the past year, HGLB's price has increased by more than 20%, and with all distributions included, the total return jumps above 36.3% [1].

HGLB's strategy involves investing in US and foreign equities and fixed income securities to generate capital appreciation and income. The fund holds 64 different securities, with equities making up 73.2% of the portfolio, followed by floating rate debt at 11.7%, MLPs at 7.3%, high yield bonds at 5.2%, and other securities at 2.6% [1]. The top three sectors—Energy (28.13%), Real Estate (26.30%), and Consumer Cyclical (10.23%)—account for nearly 65% of the assets, significantly impacting the fund's performance.

One of HGLB's key attractions is its starting dividend yield of approximately 11.9%, paid out monthly. This makes the fund an appealing choice for investors seeking supplemental income. However, the fund's distribution payouts have been inconsistent, and its reliance on net realized gains for NAV growth poses a risk [1].

The fund's valuation is currently at a large discount to NAV, trading at nearly 26%. Over the last three years, HGLB has traded at an average discount of about 28.6%. This discount may be due to the fund's structure or investment approach, as higher quality closed-end funds typically trade at a premium to NAV [1].

Interest rates play a significant role in HGLB's performance. The fund's exposure to floating rate debt and interest-rate-sensitive sectors like real estate may be suppressed by higher rates. Conversely, future interest rate cuts could serve as a catalyst for growth. However, the current macroeconomic environment suggests that rate cuts may not be imminent [1].

HGLB's annual earnings have been inconsistent, with the fund only outearning its distributions in two of the last five years. A significant portion of the distributions is funded by return of capital, indicating that the fund struggles to generate sufficient earnings to support distributions [1].

In conclusion, HGLB offers a balanced and diversified investment strategy through its blended portfolio approach. However, its performance is influenced by various factors, including interest rates and the consistency of earnings and distributions. Investors should carefully consider these aspects before making investment decisions.

References:
[1] https://seekingalpha.com/article/4794245-hglb-solid-cef-with-blended-portfolio-strategy