Lazard Global Total Return and Income Fund: Sustainable Distributions or a Recipe for NAV Erosion?

The Lazard Global Total Return and Income Fund (NYSE: LGI) has long been a fixture in the income-oriented investment landscape, offering a steady monthly distribution to shareholders. But behind its Managed Distribution Policy lies a growing concern: an increasing reliance on return of capital (ROC) to sustain those payouts. Recent disclosures reveal that 62% of cumulative distributions year-to-date (YTD) through May 2025 were classified as ROC—a figure that underscores risks to both distribution sustainability and the fund's net asset value (NAV).

The Math of ROC: A Warning Sign

For the current June 2025 distribution, 54% of the $0.14646-per-share payout is return of capital. While ROC isn't inherently negative—it's a tool funds use to maintain steady distributions—it becomes problematic when it outpaces the fund's ability to generate income or capital gains. In LGI's case, the YTD ROC component has already reached 62%, far exceeding the 7% contribution from net investment income and 28% from long-term capital gains.

This heavy reliance on principal returns raises two critical questions:
1. Can LGI sustain these distributions without further eroding NAV?
2. What does this mean for long-term investors?

NAV Erosion: The Silent Threat

The fund's NAV is the linchpin of its value proposition. If distributions routinely exceed income and capital gains, the fund must dip into investors' principal to meet payouts—a practice that gradually reduces NAV. Over time, this creates a “death spiral” where falling NAV forces higher distributions (as a percentage of NAV) to maintain the payout, or risks downgrading the distribution rate.

Consider LGI's 10.09% annualized current distribution rate as of May 2025. While impressive on paper, this rate is calculated relative to NAV, not income. If the fund's NAV declines due to ROC-heavy payouts, the distribution rate could climb further, compounding the problem.

Performance and Portfolio Risks

LGI's 10.39% five-year average annual total return (as of May 2025) suggests some success in capital appreciation. However, its strategy—investing in 60–80 global equities, including emerging markets—comes with volatility. Emerging market currencies and equities have faced headwinds in recent quarters, potentially limiting income and capital gains.

The fund's heavy ROC reliance may reflect a mismatch between its distribution policy and current market conditions. If earnings from its portfolio stagnate or decline, ROC will increasingly dominate distributions, accelerating NAV erosion.

Tax Implications: A Hidden Cost

Investors should also note that ROC distributions reduce their tax basis in the shares. If the ROC exceeds total taxable income from the fund, shareholders could face capital gains on the entire payout when selling shares—a surprise many might overlook.

The Bottom Line: Proceed with Caution

LGI's high ROC proportions warrant skepticism about its distribution sustainability. While the fund's Managed Distribution Policy provides steady income, investors must weigh this against the risks of declining NAV and potential tax complications.

Investment Takeaway:
- Hold if: You prioritize short-term income and are willing to accept NAV erosion as the cost of consistent payouts.
- Avoid if: You seek capital preservation or long-term growth, as ROC-heavy distributions may erode value over time.

Before investing, scrutinize LGI's NAV trends and income generation. If ROC continues to dominate distributions, the fund's appeal as a sustainable income source may fade.

In conclusion, LGI's ROC-heavy distributions are a red flag for investors focused on long-term sustainability. While the fund's performance metrics look robust at first glance, the math of return of capital demands careful consideration. For now, this appears less a recipe for wealth creation and more a potential drain on principal—making it a high-risk bet for all but the most income-obsessed investors.